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Copper's Drop: a Hiccup or a Haymaker?

25 October 2013 in Trading Ideas

It hasn’t been a great year for copper prices, but you wouldn’t necessarily know that if you’d only been paying attention for a few months.

The metal rose off its 2013 lows in late June, eventually rallying nearly 12% in six weeks, before settling into the rest of the year in a largely range-bound trading pattern.

In fact, copper had hit a one-month high on Tuesday – crossing, at one point, its technically significant 200-day moving average. The Dr. Copper motif has gained 5.7% in the past month. The S&P 500 is up 3.7% during that time.

Unfortunately, for investors in copper, Wednesday wasn’t as pleasant. The metal dropped a full 2% on concerns that China’s financial stability would hurt demand for the metal.

China, you may remember, is the world’s largest consumer of copper, accounting for about 40% of global demand, and fears of slowing economic growth in the country were considered to be largely responsible for copper prices slumping 16% in the first half of this year. (For the year to date, the Dr. Copper motif is off 14.4%; the S&P 500 is up 22.4%.

dr copper motifOn Wednesday, China’s short-term interest rates jumped to levels not seen since July as some companies tapped money markets to fund deadline tax payments — and as worries spread about bad debts in the banking system, analysts at Scotiabank said in a note cited by the Wall Street Journal.1

To make matters theoretically worse, China’s central bank has mostly chosen to sit this one out – refraining from removing liquidity from the domestic money market, but also not pumping any liquidity in.

Analysts saw the non-move as a sign of concern that tighter liquidity will hamper growth in the world’s second-largest economy.

On the other hand, it’s worth noting that the justification for copper’s rally of the past month also seems to be intact. Recent data showed a rise in Chinese copper imports to a 19-month high as well as accelerating growth last month.

In addition, some investors have been betting on stronger demand for copper after a weaker US jobs report rejuvenated expectations that the Federal Reserve would keep economic stimulus in place.

Ironically, perhaps, the two extreme views of copper’s short-term prognosis come at a time when the price is essentially where it was nearly six months ago. However, there don’t seem to be many betting that a lack of direction in copper prices is what we’ll have seen six months from now.

1Tatyana Shumsky, “Copper Falls 2% on China Worries,” WSJ.com, Oct. 23, 2013.

Tags: Dr. Copper