Copper is not following its seasonal trend this year. What is the price action by copper telling us about commodity and equity markets?
Copper often is referred to as “Doctor Copper”, the commodity that is all-knowing about economic trends. As goes the price trend for copper, so goes the trend in world economies and equity markets. Historically, copper prices have moved higher at this time of year in anticipation of greater demand when construction and auto production reach a seasonal peak in spring. This year, the period of seasonal strength did not arrive. Indeed, the price of copper has dropped 8.0 per cent since April 2nd. Technically, it recently broke support at US$3.69 per lb., moved below its 20, 50 and 200 day moving averages and established an intermediate downtrend.
Copper: technical chart
The breakdown by copper corresponded with a series of events that confirms copper’s reputation as an economic guru:
• Equity markets for most of the world’s developed nations rolled over in the first week in April. The S&P 500 Index and TSX Composite Index are down 3.0 per cent and the Europe 350 Index is down 5.4 per cent.
• Weakness in copper prices spilled into other commodity prices. The CRB Commodity Index dropped 4.1 per cent from the first week in April.
• U.S. data released this week is showing a slow-down in economic growth in the second quarter. Economic reports released this week that were less than consensus included the April Empire State Manufacturing Index, March Housing Starts, March Industrial Production, March Capacity Utilization, Weekly Initial Jobless Claims, the April Philadelphia Fed Index and March Existing Home Sales.
• Responses to first quarter earnings released to date were mixed at best despite better than consensus results. Frequently, first quarter earnings reports also included lower second quarter guidance. Unless companies reported “blow-out” results, stock prices frequently weakened following release of results. Traders were selling on news.
Listen to “Doctor Copper.” It is telling us that economic prospects are less robust than expected in the second quarter and equity markets are vulnerable to a correction lasting at least into this summer.
Copper seasonality chart
Don Vialoux is the author of free daily reports on equity markets, sectors, commodities and Exchange Traded Funds. Daily reports are available here at http://www.timingthemarket.ca/. He is also a research analyst for Horizons Investment Management Inc. All of the views expressed herein are his personal views although they may be reflected in positions or transactions in the various client portfolios managed by Horizons Investment Management.