WHAT’S UP WITH DR COPPER? After the copper price collapsed on Wednesday, an experienced portfolio manager at a hedge fund warned of reading too much into big market moves that occur in the Asian time zone.
He and his colleagues take the view that it is dangerous to take your trading lead when market movements are driven by players in Asia. It’s a rule of thumb that places greater weight on market movements when traders in the United States and Europe are awake.
The fund manager said it was possible that stop losses triggered during trading in the Asian region fed a downward spiral in copper prices.
That is not a reason to dismiss the sudden downward movement in copper, which has traditionally been a bellwether of global industrial activity.
Of course, the single largest consumer of copper is China. It accounts for about 40 per cent of world demand, according to the respected International Copper Study Group. China’s economy is slowing from 7.5 per cent GDP growth in 2014 to 7 per cent this year and 6.5 per cent in 2016, according to forecasts from several global investment banks.
ICSG’s latest commentary and accompanying statistical analysis published on December 19 highlights the deficit in supply in the first nine months of 2014.
However, more recent forecasts by global investment banks have noted the possibility of an excess of supply in the early months of this year.
Rio Tinto, which is a major copper producer, told investors in London last month that it expected “a notional copper market surplus could put pressure on 2015 prices”.
But it said the market had strong long-term fundamentals.
One reason given for the collapse in copper prices was the downgrading of global growth by the World Bank.
That has a certain ironic twist, given that copper prices have disconnected from the movement in the S&P 500 in the US, which includes many industrial companies.
Copper’s key role in industrial production earned it the moniker Dr Copper. It was seen as the leading indicator of trouble in markets. But Andrew Thrasher, an investment analyst who writes about commodities, said in a posting in December that Dr Copper had been replaced by technology.
“The market seems to be much more focused on the happenings of Silicon Valley rather than Milwaukee or Detroit,” he said.
“While the industrial sector remains a large piece of our economy, it no longer is the driver of growth. At least that’s what price action has been telling us.”
Another respected pundit, Peter Brandt, who has been in commodity trading since 1976, has noted that copper “is a manipulated market”.
That sounds like a conspiracy theory, but scratch below the service of the London Metal Exchange and you will find few rules and regulations. It is one of the few markets where traders can legally front-run client orders and where use of inside information is not unknown.
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