Following the Federal Reserve's rate decision in September, the metals market has shown divergent trends. Commodity prices like London gold and Shanghai copper have rebounded, with copper recovering to near its previous highs, while related equities have only posted modest gains. Why are commodity and stock markets out of sync now? As we approach the critical window before the U.S. midterm elections in November, this analysis examines the macro environment and opportunities across the metals sector.
In our earlier assessment from early September, we projected that in the phase between the Fed's September meeting and the November elections, the metals complex would maintain a relatively strong stance irrespective of the rate decision. The recent commodity price action appears to confirm this view, but the equity market has only partially followed. This piece will examine the reasons behind this divergence.
Core Divergence: Equities and Commodities Perceive Rate Hikes Differently
The central disagreement in the market revolves around the future path of Fed rate increases.
Equity investors are concerned that persistent tightening will trigger a recession, which is why the sector only saw a mild bounce after the September meeting. In contrast, commodity traders believe that moderate hikes will not alter the underlying industry trend, with copper prices having already repaired to near the 112,000 yuan per tonne level. The debate hinges on how the Fed's next moves are interpreted. Our analysis leans toward a scenario of gradual and moderate rate increases. On the macro front, the Fed is currently constrained by three factors: tame inflation, slowing economic growth, and high government debt. This makes it difficult to replicate the aggressive tightening cycle of 2022. While rate hikes may support the dollar, they are unlikely to change the broader industry momentum. With expectations of moderate hikes intact, the long-term investment case for metals remains solid.
Macro Constraints: The Fed Cannot Replicate the 2022 Aggressive Hiking Cycle
The aggressive 425 basis points of hikes in 2022 were a response to combat runaway inflation above 9% and to compensate for the credit discount that emerged after geopolitical shocks. The current Fed, however, faces a different set of challenges: inflation is more contained, the economy is decelerating, and debt levels are burdensome. This environment only permits a cautious, step-by-step approach to tightening, perhaps in 25 basis point increments, to balance price stability with employment goals. The core issue for the U.S. is the unsustainable level of fiscal deficit and debt. Monetary policy must carefully navigate between fighting inflation, supporting jobs, and managing the cost of debt service. Furthermore, raising rates does not increase physical oil supply nor does it encourage central banks abroad to buy U.S. Treasuries. Instead, it could weaken currencies like the yen and euro, prompting other central banks to sell U.S. debt to stabilize their own exchange rates.
Analysis by Metal
Precious Metals: Downside Support with Favorable Long-Term Outlook
Global central bank gold purchases provide a solid floor, limiting downside risks. However, the upside is currently capped by expectations of more Fed tightening. Once the market confirms the peak of this rate cycle, precious metals are well-positioned for a recovery. The current fiscal predicament in the U.S. draws historical parallels to the mid-to-late Ming Dynasty in China, characterized by rigid fiscal spending, strong resistance to reform from entrenched interests, and ever-growing debt burdens. In such environments, fiat currencies tend to depreciate, making physical assets a more reliable store of value. Just as silver displaced paper currency and became the de facto standard in Ming China, this rationale underpins our positive long-term view on precious and physical assets today.
Copper: Near-Term Smelter Cuts, Long-Term AI Demand
In the short term, regulatory notices on cost accounting for industrial goods, combined with declining sulfuric acid prices and treatment charges falling below minus $200 per tonne, increase the likelihood of smelter production cuts in China. This, alongside falling social inventories, supports stronger copper prices. Over the long term, the energy transition and the rapid build-out of AI computing infrastructure underpin robust demand for industrial metals. Regarding potential U.S. tariffs on copper, the impact on prices and long-term inflation may be overstated. The U.S. consumes only about 1.7 million tonnes annually, a fraction of China's 10 million tonnes. Copper has a small weight in the U.S. CPI basket, and tariff costs could be absorbed by the supply chain, substituted, or offset by increased scrap recycling, diluting the effect on end-user prices. Thus, even a 15% tariff would likely have a minimal impact on long-term inflation expectations.
Aluminum: Significant Divergence of Views, Potential for Surprises
Near term, slower new capacity additions in Indonesia and uncertainties around restarting operations in the Middle East, coupled with declining global and Chinese inventories, provide support for aluminum prices. Over the medium term, expectations of new supply from Indonesia and restarts in the Middle East may limit upside. However, given the strength in gold and copper, it is unwise to be overly bearish on aluminum's downside. Even in a conservative scenario, the current price levels still offer attractive dividend yields, suggesting reasonable value.
Minor Metals: Rigid Supply, High Volatility and Elasticity
The supply of minor metals remains structurally tight, while demand is being reshaped by AI and frontier technologies. For instance, the boom in AI computing and optical communications is boosting demand for tin. Aerospace and embodied intelligence are driving growth in rare earth magnets. The push for semiconductor self-sufficiency is opening domestic substitution opportunities for high-purity tungsten hexafluoride, with orders accelerating. On the supply side, policies are tightening the control over strategically critical minerals. China's new implementation regulations for the Mineral Resources Law, effective from mid-2026, formally classify 36 key minerals, including rare earths, tungsten, lithium, cobalt, gallium, and germanium, as national strategic resources. This creates a long-term synergy between supply constraints and strategic demand.
Summary and Outlook
In conclusion, we anticipate the metals sector will continue to perform strongly in the period following the September Fed meeting and leading up to the November U.S. midterm elections. The Federal Reserve is navigating a complex environment of moderate inflation, slowing growth, and high debt, making a repeat of the 2022 aggressive hiking cycle highly unlikely. While rate increases offer some support to the dollar, they do not alter the fundamental industry trends. With expectations for moderate rate adjustments, the long-term investment value of the metals sector remains unchanged.
Positioning for the AI Era with Metals
The HuaBao Nonferrous Metals ETF (159876) and its feeder funds (Class A: 017140, Class C: 017141) offer comprehensive exposure to leaders in copper, aluminum, rare earths, gold, lithium, tungsten, molybdenum, and tin, including key holdings like Zijin Mining, CMOC Group, China Northern Rare Earth, and Aluminum Corporation of China. The 2026 interim results showed that all 60 constituent stocks were profitable, with nearly half reporting profit growth of over 100% year-over-year, providing a solid fundamental foundation. Additionally, the fund holds significantly more constituent stocks compared to similar nonferrous indices, offering better coverage of the semiconductor and new materials sectors. This ETF serves as an efficient tool for investors looking to gain broad exposure to the metals industry and capitalize on the sector's momentum.
Source: Shanghai and Shenzhen stock exchanges, as of 2026.9.23.
Note: The mentioned companies are constituents of the index tracked by the HuaBao Nonferrous Metals ETF (159876). As of the end of August, their respective weights were: Zijin Mining, 11.14%; CMOC Group, 7.12%; China Northern Rare Earth, 4.40%; and Aluminum Corporation of China, 3.31%. This information is for display purposes only and does not constitute investment advice.
Risk Disclosure
The ETF passively tracks the CSI Nonferrous Metals Index. Past performance is not indicative of future results. Investors should be aware of the risks associated with fund investing. The fund manager assesses the risk level of this fund as R3-Medium Risk. This information is for reference only and does not constitute investment advice. Investors must make their own decisions regarding their investments. Fund investment involves risks. The past performance of the fund does not represent its future performance. The performance of other funds managed by the fund manager does not guarantee the performance of this fund.
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