Most commodity markets have rebounded on the rekindled trade talks between the U.S. and China. Last weeks announcement following the G20 summit was a major breath of fresh air for global markets, which were previously saddled with a number of economic worries.
However, one ‘canary-in-the-coalmine’ commodity that’s been a historically accurate predictor of recessions hasn’t recovered like other commodities. Instead, it has continued to fall, signaling that trade-talks might not be enough to lift the global economy out of a possible recession.
Copper prices have continued to fall over the past week, signaling continued investor worries for the global economy. A critical industrial metal for the manufacturing and construction sectors, copper prices fell by 1.7 percent last week whereas most other commodities (except for perhaps gold) have seen an increase following the G20 announcements. Even before this development, copper prices have fallen in the eight of the last 10 weeks.
While copper is used to build everything from electric vehicles, office buildings, and other industrial components, the red metal is closely correlated with the strength of the Chinese economy, which is the world’s largest copper consumer.
While other industrial metals, such as aluminum, are more broadly indicative of the global economic situation, copper is a better predictor of the Asian region. With the Chinese economy being so closely linked with the U.S., copper’s ability to predict potential recessions has earned it the title of “Dr. Copper” by many financial experts.
In particular, weak manufacturing data from China has led to concerns about whether the country can still stimulate economic growth or if a collapse in the rapidly growing country is on the horizon. A recent report showed that the Ciaxin China manufacturing purchasing managers index fell below 50 in June, an import number that separates an expansion in factory output from a contraction.
At the same time, similar indexes gauging manufacturing activity in both the U.S. and Europe have been falling in recent months. Other commodities and asset classes, such as stocks, largely brushed off the report.
“The market is watching those numbers and is concerned this could be the start of an unfriendly trend,” said Tai Wong, head of base and precious metals derivatives trading at Bank of Montreal according to The Wall Street Journal. “It’s going to take a little more than the defrosting of trade talks to really give copper and the rest of the base metals complex a boost.”
Experts are also saying that industrial commodities haven’t benefited as much from projections of lower interest rates since a potential reduction in industrial demand could lead to an excess in supply and further push down prices.
Prices for copper ended the month of June up around only 3 percent in comparison to the 17 percent gain seen in the S&P 500 and the 14 percent increase in the S&P GSCI commodities index.
With the red metal so significantly underperforming even commodities-based indexes, it’s a worrying sign for economists who recognize coppers’ historical role in predicting economic downturns. Time will tell whether a downturn truly is on the horizon.
