Submitted by Mark Hanna
Courtesy of MarketMontage. View original post here.
Long time readers will know I’ve said “Doctor Copper” – once a fantastic economic indicator for economic activity – now has become much more of an indicator of demand out of China. This is true not just for copper, but a whole host of commodities, as the demand by the Chinese swamps the rest of the world. See March 2009 story – Commodities: It’s China World, We Just Live in It. China at times the past few years accounted for half the world’s output of steel… cement… you name it. China clamped down on the speculation in copper in the first half of 2011 as stories surfaced that it literally was being used as collateral for loans outside of the banking system. That, along with a push to slow down the economy due to inflation issues, hurt the red metal’s demand in the country.
While the economy is not the stock market… and one could claim I am data mining, the relationship of copper v China’s stock market v America’s stock market shows these correlations over the past year. Granted, there are millions of moving parts in what moves markets so take this with a grain of salt.
However, as the Chinese stock market has bounced (a bit) off very oversold level – so has copper of late. In fact, it is approaching some important resistance areas – jumping over them would be a feather in the market’s cap.
The WSJ is finally catching onto the trend, with a story this weekend figuring out that copper now has a lot more to do with China than the U.S. A few years late, but at least they finally are seeing the light.
- Copper, used in goods ranging from iPads to refrigerators, has long been called “Dr. Copper” for its ability to quickly reflect changes in the economy. But those who buy and sell primarily U.S. stocks should be wary of relying on the doctor for investment tips, analysts say.
- As copper consumption in China and other emerging economies ballooned during the last decade, its tie to the performance of the U.S. economy has frayed.
- Since the beginning of the year, copper’s gains have outpaced the rise in U.S. stocks. That is in large part due to data showing China imported a surprisingly large amount of copper in December, while some readings in the U.S., like retail sales for the holiday season, ended up disappointing.
- In 2011, the S&P 500 ended nearly flat, while copper futures plunged 23%, as economic indicators in the U.S. continued to improve even as China took significant steps to rein in lending, which limited demand for industrial metals. “Copper is still a very good indicator for the Chinese economy, but perhaps not as important as it once was to the U.S. and Europe,” said Adrian Day, president of Adrian Day Asset Management.
- For copper traders, the focus is on whether China will hold to its growth targets and trigger a rebound in the market for the metal. Mr. Day said he is betting Beijing can navigate the economic turbulence, investing in copper mining companies to gain exposure to the metal.
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Any securities mentioned on this page are not held by the author in his personal portfolio. Securities mentioned may or may not be held by the author in the mutual fund he manages, the Paladin Long Short Fund (PALFX). For a list of the aforementioned fund’s holdings at the end of the prior quarter, visit the Paladin Funds website at http://www.paladinfunds.com/holdings/blog
