Trade tensions between the U.S. and China have hit global manufacturing pretty hard. As both countries put tariffs on each others’ goods and raw materials, it wasn’t a surprise to economists when recent factory data released were at the lowest point seen in over seven years.
As a result, industrial commodities took a hit on Wednesday, with copper in particular declining substantially.
Copper futures for delivery in July fell down to $2.62 a pound, almost a two percent drop in a 24-hour period. The red metal has now reached a five-month low, which is a worrying sign for investors wondering whether a bear market is inbound.
Copper has historically been an excellent predictor for global recessions specifically for its ability to gauge the health of Asian economies like China, which is one of the largest consumers of copper globally. Earning the moniker of “Dr. Copper” by experts, there have been many times in the past where strong copper prices helped prove
Specifically, the global Purchasing Managers Index (PMI) fell down to 49.8 last month, which indicated a contraction in worldwide factory activity for the first time since 2012. At the same time, the May PMI for the U.S. also saw its worst figure since the aftermath of the 2008 financial crisis.
While industrial metals like aluminum, which are better predictors of worldwide economic health, would have reacted more to the global PMI figures, copper fell mainly due to China’s official PMI figures also being below 50, which signals a contraction. At the same time, its employment sub-index reached the lowest level in over a decade.
Fears of an upcoming bear market were becoming frantic over the past couple of months, with events like the inversion of long-term and short-term U.S. yield curves heralding a possible recession soon.
Commodity prices (aside from precious metals) were the main bastion of hope against this, with copper prices in particular remaining strong. Now that the red metal has plunged in value, analysts are becoming slightly more worried.
However, with most of this decline being attributed to trade tensions and tariffs between the world’s two economic superpowers, should a trade agreement be reached, this decline could completely vanish.
The World Bank also reported earlier this week that global economic growth is forecasted at around 2.6 percent. This was a downgrade of 0.3 percent from previous forecasts, reflecting the weaker than expected investment and international trade seen in 2019.
“Current economic momentum remains weak, while heightened debt levels and subdued investment growth in developing economies are holding countries back from achieving their potential. It’s urgent that countries make significant structural reforms that improve the business climate and attract investment,” said the report. “They also need to make debt management and transparency a high priority so that new debt adds to growth and investment.”
Considering that how much of this global economic decline has been affected by the ongoing trade tensions, this could all turn around very quickly. Until then, it appears global politics will be the major factor impacting both economic data as well as industrial commodity prices.