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CFDs are complex instruments. 70% of retail client accounts lose money when trading CFDs, with this investment provider. You can lose your money rapidly due to leverage. Please ensure you understand how this product works and whether you can afford to take the high risk of losing money.

Movement of metals in volatile times: part three – high grade copper

The price of the metal – a core ingredient in construction and manufacturing – has taken a hit on a worsening trade war, a global slowdown in manufacturing, and recessionary fears.

Mine Source: Bloomberg

The three big factors driving copper’s price:

The trade war

A brief look at copper’s use as an ingredient in important items that include construction, power generation, manufacturing of electronic products, industrial machinery, and transportation vehicles, and it’s clear that the ongoing US-China trade war would be a negative factor in this input’s price. The application of tariffs on Chinese imports into the US and vice versa has resulted in a drop in demand for commodities in general, as shifting supply chains is set to disrupt production, at least in the short term. The expected higher prices that a rise in tariffs would bring to both sides of the Pacific would reduce demand, and in turn consumption of goods.

China’s domestic slowdown and yuan weakness

In order to (at least partially) offset the tariffs and entice manufacturers into staying in China and avoid shifting to other manufacturing hubs, the PBOC allowed the yuan to weaken against the dollar past the infamous seven mark. While a weaker currency makes exports more competitive and offsets some of the 15-30% tariffs that the US has placed on Chinese imports, its expected result internally is a reduction in demand, as copper (priced in dollars) becomes more expensive for the Chinese market, which consumes around 50% of the much-needed industrial commodity. The slowdown within the Chinese market that has sent manufacturing PMI figures contracting means demand for inputs have fallen alongside it and dampened the outlook for growth in the world’s manufacturing powerhouse. Fears of losing the US market and a weak market at home has forced Chinese manufacturers to dump construction and industrial goods at a loss in the short-term in other markets in the hopes of liquidating those goods and gaining new market share, hurting other manufacturers in the process.

Recessionary fears rising and automakers lag

And then there are recessionary fears, which are never a good sign for a commodity in need of improved demand to increase usage. While on the one hand electric vehicles demand more copper than combustion engine cars, demand would need to significantly increase to offset what has been a drop in demand for cars globally, and has sent automakers’ shares lagging as preliminary GDP figures of countries such as Germany contract. Any further confirmation of an economic slowdown and ongoing contractions in global manufacturing PMI figures would prevent copper’s price from rising back up.

What might be in store for the price of copper?

From a technical standpoint, it’s a bear trend technical overview where its bear trend line is holding but failing to show significant follow through and stalling somewhat. Its price is below all its main long-term moving averages, its DMI negative, its ADX showing an ongoing propensity to trend, and its RSI in oversold territory.

Retail bias is at a heavy long 69%, with traders holding the opposite side of the trade hoping for retracement back up following consolidatory moves earlier this month. Institutional bias as per the latest CoT report out of the CFTC is showing an opposite majority short 63%, opting to hold long positions in safe haven gold and silver anticipating further risk-off market scenarios that would hurt commodities like copper but aid precious metals instead.

That means strategies that conform to the technical overview of a bear trend would involve selling off the 1st Resistance level but after a reversal (waiting for it to be breached fist) and/or selling the 1st Support level upon a breakout from above.

Should a trade deal occur between the US and China – and that’s an unlikely scenario – that would aid a risk-on environment and help input commodities like copper in recovering off the lows, aiding in that case contrarian buy strategies off the 1st Resistance and 1st Support, though ideally with increased volatility to consider 2nd levels instead.

*Resistance and support levels are based on the average daily ranges over the past 30 days for High Grade Copper

This information has been prepared by IG, a trading name of IG Markets Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients.

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