Commodities 6 minutes to read

Copper signals to stocks that all's not well

Ole Hansen

Head of Commodity Strategy, Saxo Bank Group

Summary:  The short-term outlook for HG Copper has deteriorated this week following unexpectedly weak readings on manufacturing activity in China and the United States, the world's two biggest consumers of the industrial metal.


Copper, which is  widely used as a conductor of heat and electricity, dropped almost 3% yesterday – the biggest fall since last August – to a ten-week low of $2.777/lb, close to its 200-day moving average. The forecast for tight supply, the continued move towards electrification, combined with infrastructure projects, is likely to provide a long-term support for copper. In the short term, however, the focus will primarily be on finding support with $2.717 representing a key line in a sand below $2.777/lb as mentioned.

Source: Saxo Bank
The range-bound nature of the market since February has left many speculative investors sidelined with the hedge fund net position not swaying much away from neutral during this time. The renewed downside momentum is likely to have attracted some additional length to the short side and those recently established short positions will now be watching closely the above mentioned support levels for signs of an even deeper sell-off.
Apart from the recent dollar strength, which during the latter part of April reduced the appeal for metals, both precious and industrial, it was the slowdown in manufacturing activity in both US and China that did most of the damage. The drop in the US ISM manufacturing index for April was particularly aggressive as it dropped to the lowest level since October 2016. While still in expansionary territory above 50, the broad-based declines in new orders, new export orders and production suggest a further cooling which contradicts but also explains why the market failed to get excited about the Q1 GDP reading last Friday.  

These and other recent data from the world’s two biggest economies also highlight why the market is increasingly expecting that a trade deal between the two countries will be reached sooner rather than later. A deal will undoubtedly create a lot of market-friendly headlines but we see an overriding risk that it could by over-hyped with weak control mechanisms put in place to police a deal. 
Industrial metals, as seen through the Bloomberg Industrial Metal Index, have been tracking the developments in the US stock market relatively closely since last October. A dislocation, however, has occurred during April and it raises the question of who is right. Bearing in mind the compressed levels of volatility and elevated speculation in lower volatility as seen through the Cboe VIX futures we can potentially look forward to a bumpy stock market ride ahead of the annual holiday season between July and August. 
Where is the potential support coming from?

While demand may struggle to pick up amid the continued worries about weaker economic growth, the physical market is widely expected to remain tight during the coming years. Inventory levels at exchange-monitored warehouses are currently 442,000 tons, some 24% below the three-year average. The forecast for tight supply the continued move towards electrification combined with infrastructure projects is likely to provide a long-term support for copper. 

Just last week in the US, the Democratic congressional leaders emerged from a meeting at the White House and announced that President Trump had agree to pursue a $2 trillion infrastructure plan to upgrade the nation’s highways, railroads, bridges and broadband. The big question, however, remains who should pay for this initiative. Not least considering how the US has become increasingly maxed out on debt and tax cuts which so far have failed to boost the economy. 

Disclaimer

The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website. This content is not intended to and does not change or expand on the execution-only service. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
- Full disclaimer (https://www.home.saxo/en-gb/legal/disclaimer/saxo-disclaimer)

Saxo Markets
40 Bank Street, 26th floor
E14 5DA
London
United Kingdom

United Kingdom

Trade Responsibly
All trading carries risk. To help you understand the risks involved we have put together a series of Key Information Documents (KIDs) highlighting the risks and rewards related to each product. Read more
Additional Key Information Documents are available in our trading platform.

Saxo Markets is a registered Trading Name of Saxo Capital Markets Ltd (‘SCML’). SCML is authorised and regulated by the Financial Conduct Authority, Firm Reference Number 551422. Registered address: 26th Floor, 40 Bank Street, Canary Wharf, London E14 5DA. Company number 7413871.

This website, including the information and materials contained in it, are not directed at, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in the United States, Belgium or any other jurisdiction where such distribution, publication, availability or use would be contrary to applicable law or regulation.

It is important that you understand that with investments, your capital is at risk. Past performance is not a guide to future performance. It is your responsibility to ensure that you make an informed decision about whether or not to invest with us. If you are still unsure if investing is right for you, please seek independent advice. Saxo Markets assumes no liability for any loss sustained from trading in accordance with a recommendation.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the U.S. and other countries. App Store is a service mark of Apple Inc. Android is a trademark of Google Inc.