Macro Wrap – Dr. Copper

by Enis December 18, 2012 7:37 am • Commentary

In the past month, I’ve heard more and more traders assume the Chinese growth story was back on track, and China will boom in 2013.  Yes, the Shanghai stock market was oversold in the midst of a global stock rally in 2012.  And yes, there is new leadership in China that has made appealing speeches touting growth reform.  But at the end of the day, growth rests on the actions and incentives of more than 1 billion people.  And price signals from markets like those in commodities make me skeptical that happy days are here again in China.

The commodity boom during the 2000’s was a main beneficiary of Chinese growth.  Given that investment makes up an even greater percentage of GDP in China relative to 5 years ago, that massive fixed investment should be flowing through to commodities demand today as well.  Here is the 5 year weekly chart of copper futures:



The current price setup is neutral, as the commodity’s range has tightened over the last 6 months.  The next 10% move in either direction will likely establish a clearer long-term trend.  Copper peaked with the global economy in the spring of 2011, and has not shown much strength on this recent China bounce.

Copper is often called Dr. Copper because it has a PhD in economic forecasting.  I wouldn’t give it that much credit, but it is a crucial price signal for the Chinese economy.  That’s because copper has an important place in China not just in the industrial sector, but perhaps an even more crucial role in the financing sector of the economy (as collateral for loans).  I’ve mentioned before FT Alphaville’s coverage of copper stockpiles in China as an indication of financing activity.  Copper’s price sends the best real-time signal for just how excessive those inventories have become.  And I think it’s a much better indicator of the Chinese growth story than traders’ anecdotal opinions.

Markets overnight:

  • Asia was mostly green, led by Japan, as fiscal cliff optimism carried on overnight
  • Europe has traded in a tight range since the open, up between 0.25 and 0.5% all morning.  SPX futures are indicated up 0.4%
  • The dollar and Treasuries are close to flat, commodities are mixed