Updated: 12-11-2017

Might Copper Be Copping to a Growth Slowdown?
Updated: 06-Dec-17  10:48AM ET
Analyst: Pat O'Hare

Copper has leading indicator status since it is used in so many industrial applications. Accordingly, market participants keep a close eye on the trend in copper prices to corroborate, or invalidate, an economic narrative.

Outside Looking In

Looking at things today, one might be inclined to think the stock market has gotten ahead of itself with its economic growth expectations. To that end, copper prices were down 9.0% as of Tuesday's close from their October 16 peak. The S&P 500, in comparison, was up 2.8% over the same period.

Strikingly, that peak in copper prices occurred just ahead of the start of the National Congress of the Communist Party of China, which ran from October 18-24.

Copper prices made a huge move leading up to that meeting, soaring 30% between May 9 and October 16. That rally transpired at a time when manufacturing data out of China was improving, the U.S. dollar was weakening, and the Shanghai Composite was rallying.

How quickly times change.

China's manufacturing data has been softening of late, the U.S. dollar has stopped weakening, and the Shanghai Composite has been languishing as bond yields have been rising (a point highlighted in last week's column).

None of that is exactly friendly for copper prices, yet the least friendly item of all may be a Chinese government that is looking to tackle excess leverage in its financial system.

Arguably, the government's vigilance in doing so was more relaxed leading up to the National Party Congress as part of an effort to ensure public confidence in the viability of "the system" in front of that key political gathering.

Now that the National Party Congress has concluded, and Xi Jinping has been reaffirmed President and elevated to "Core Leader," the Chinese government may choose to be more forceful with its regulatory efforts.

If that is the path the government chooses, it is possible China's growth doesn't accelerate in 2018 even though the current market narrative, which has pushed major stock indices to record highs, is rooted in the theme of a synchronous pickup in global growth.

What It All Means

A slowdown in growth in China, or even muted growth, could be a big deal for copper prices since China accounts for approximately 50% of global copper consumption. Fading copper prices, then, could perhaps reflect a view that China's growth will be crimped by government efforts to rein in speculative excesses in its financial system.

Added time will tell, yet fading copper prices are incongruent with the hopeful growth narrative that has been driving up stock prices.

To be fair, it is possible that copper is just in a consolidative trade following its huge run. If the selling persists, though, and key technical support is taken out at $2.90/lb, one shouldn't be surprised to see future data fail to live up to the rising growth expectations underpinning stock prices.

And if that's the case, one also shouldn't be surprised to see longer-dated Treasury yields stay lower for longer.

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