Copper breaks out on anticipated US-China deal
Copper double bottom points towards wider recovery, yet with markets front-running a US-China breakthrough, could we see a pullback come into play?
Copper prices have been under the microscope over the past two months, with the price breaking a critical resistance level to bring about a seven-month high. One of the core drivers behind both its 2018 decline and 2019 resurgence have been the expected demand coming from China; the worlds biggest consumer of copper. Many in the markets call this industrial metal Dr Copper, as a reference to the fact that copper prices provide a picture of global economic health at a given point in time. The widespread use of copper within construction ensures that the product is in high demand throughout times of economic expansion. Conversely, flagging economic growth will be accompanied by falling copper prices. With substantial amounts of copper utilised within the development of electric cars, there is expected to be a greater demand for this commodity as we move away from vehicles powered by fossil fuels.
To a large extent, the US-China trade war has been a great example of how markets perceive the commodity, with the price action not just responding to changing economic data, but also the perception of future changes in demand. As such, we are currently at an interesting point in time, where economic data points to further weakness, yet market perception is frontrunning an economic recovery.
Recent data from Markit has highlighted a sharp decline in output from companies that intensely use copper in their processes. That alludes to falling gross domestic product (GDP), with the two typically going hand in hand.
Looking at the purchasing managers index (PMI) elements from those producers, a deterioration in new orders for the three months ahead points towards the possibility of further downside to come for copper prices.
Clearly, we are seeing a weakening growth picture and demand for copper leading to the weaker picture for copper. However, with a six-month high for copper prices over the past two months, there is a high degree of respect for the potential future pathway for growth.
US-Chinese trade talks appear to be reaching a crescendo, with the US President Donald Trump postponing the 1 March deadline which would have seen tariffs ramped up to 25%. With the prospect of improved relations between the world’s two largest economies, we are clearly seeing markets front-run any actual improvement to the economic picture. This could be a risky business if we fail to see that expected breakthrough take shape, yet when taking the technical picture into account, there is certainly an argument for further gains if things continue to head in the right direction.
Looking at the weekly chart, there is a clear double bottom formation that has completed last week, bringing about a picture of impending upside to come. However, this wider picture also highlights the major resistance zone we have seen reached, with the price turning lower from the area encompassing the March 2018 low and July 2014 peak. Given the lack of any data to highlight an economic recovery in play, we could see some doubts come into play over a prospective deal between the US and China, with the price looking at risk if we remain below $2.958, there is a good chance that we could see this market retrace from here. However, such downside would likely provide us with a precursor to further upside as US-China trade talks progress. Thus, the short-term outlook remains reliant upon the ability or inability to break through $2.958 resistance. In either case, with US-China trade talks moving in the right direction, there is a good chance that we have bottomed out. However, if we did see prices turn south over the near term, this would likely provide us with a buying opportunity unless we see a drop below $2.5439.
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