Confounding Copper
Today's Idea 6/21/2011
Copper futures have been trading non-directionally for the past month, as many traders try to make sense of current economic data and formulate projections of what the future may bring. Fundamentally, it seems as though the market is well supplied, largely due to previous stockpiling in China. This brings about questions regarding when China will restock and to what degree. Some traders have discounted anemic US and European growth, making Chinese data even more important. Technically, the picture remains just as murky as the fundamental outlook. The tightening of the chart hints at an imminent breakout, but the direction of the breakout is what is eluding traders. Some traders may wish to consider sitting back in the wings to wait for a direction to go long or short the market. The chart can be used for guidance to set objective and stop levels once a breakout occurs. Traders not wishing to trade Copper itself may also look for the breakout to help formulate opinions in other markets, as the price of the metal can oftentimes be seen as a better leading indicator of economic growth than government reports.
Fundamentals
Copper futures have been trading just north of the $4 level for roughly a month, lacking a consensus among traders as to where the global economy is heading. It seems as though traders have found a "fair price" for the time being, given the lack of clarity over the state of European and US debt and questions about China's Copper market. Chinese imports in May were down 47% over the same period a year ago. This indicates that the large stockpiles that the industrial giant has built up are being destocked in order to provide cheaper metal to local users and making it non-cost effective to buy the red metal overseas. China will eventually have to restock these inventories, but questions remain as to the size of domestic stocks, since they are not reported with the same level of transparency as LME inventories. China posted a stellar economic quarter, with metrics being better than expected virtually across the board. However, the cloud of inevitable interest rate action by the People's Bank of China (PBoC) has many traders concerned that eventually the central bank will act too harshly and hamper growth. The interest rate hikes already undertaken and the increase in bank capital requirements have done little to slow Chinese commodity demand, much to the government's displeasure. In the West, the European debt crisis, most notably in Greece, threatens to bring EU growth to a grinding halt. In the worst case scenario, we can see contagion of Greece's problems to other member states, which would drive borrowing costs upward. The US housing market, which is the next most important Copper market mover behind China, may be on the brink of a double-dip, which could result in further weakness in US Copper demand. The mix of data and opinions has resulted in choppy, sideways trading in Copper. Historically, Copper has been one of the most volatile commodities, and the recent lack of direction could be the calm before the storm.
Technical Notes
Turing to the chart, we see the September Copper contract trading in a relatively tight range north of 4.00. The range has been tightening, resulting in what appears to be a wedge formation on the daily chart. The market is entering the narrow end of the wedge, indicating that a breakout to either direction may be on the horizon. Prices are well south of the 100-day moving average, but are trading near the 20 and 50-day averages. Momentum, RSI and the stochastics are all giving neutral readings, offering no hint to future market direction.
Rob Kurzatkowski, Senior Commodity Analyst
