Traders' views - Spread betting

China and Europe fears could dent copper prices

By , 05 Apr 2012

CMC Markets' senior market analyst gives his view on how negative news may hit the copper price

Copper has proven its worth as an economic bellwether, rising from low levels at the end of 2008 at $1.26 to record highs in 2010 at $4.65, on increased liquidity provided by global central banks, as well as optimism on rising economic growth in China, emerging markets as well as Europe and the US.

Now that Europe is starting to look sickly in terms of near term growth prospects and likely to spend the first half of 2012 in recession, concerns are rising that, in the face of high stockpiles, demand will start to tail off.

Chinese demand looks like it could well start to slow down a touch, given that one of its key export markets remains Europe.

Doubts have been creeping into the market about the sustainability of the Chinese growth story after the Chinese downgraded their growth estimates for the economy for the first time since 2004.

A close eye needs to be kept on Chinese manufacturing data which appears to be showing some signs of divergence between the official PMI measure and the HSBC PMI measure. At the beginning of this month the official measure of manufacturing PMI jumped from 51 to 53.1, however in complete contrast to this measure the HSBC showed a deeper contraction from 49.6 to 48.3.

One of the reasons for this discrepancy could be that the official figures measure the output from large corporations, while the HSBC figures measures the output from small and medium size enterprises. Even so, with so much of Chinese export capability dependent on Europe and recent European data pointing to a significant recession, investors need to be prepared for a “soft landing” at the very least.

Weighing on copper

Another factor that could weigh on copper prices is the possibility of a significant US dollar bounce after March’s FOMC minutes seemed to suggest that further QE could well be off the agenda for the foreseeable future.

Copper prices are struggling to break much above $4 and if this trend continues we could well see prices drift back towards the $3.50 level, through the 200 day MA at $3.70 which has supported prices since the beginning of this year.

A turn over in copper prices is also likely to be negative for equity markets given the close correlation between the two, as illustrated above. The red and purple lines indicate the movements of the Dow and FTSE relative to the copper price in grey.

 

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