Copper, Equities Melt Down
Tuesday, August 9, 2011
Copper prices have taken a drubbing in recent trading sessions as a result of the downgrade of US debt and investors being dissatisfied with the government's handling of the debt ceiling. These factors may take a toll on the global economy and come at a time when Europe is already reeling from its own debt problems. Technically, Copper has taken-out several minor support levels and now threatens more critical support at 3.90, and possibly, 3.75. If these levels are violated, prices could continue to slide for an extended period. Some traders may wish to sit on the sidelines of the Copper market, as the moves in the futures market will likely remain violent and the options market is too thin to trade. Traders could instead perhaps use the Copper market as a gauge.
Fundamentals
Copper futures were punished during the stock market malaise this past week, as economic uncertainty took hold. Economically sensitive commodities, most notably Crude Oil and Copper, were under fire, as investors seem not just concerned about a double-dip recession in the US, but a global recession. China, the key driver of the Copper market, finds itself in a unique situation. During the last global recession, the industrial giant put stimulus in place to aid domestic growth, but inflation is now the primary focus. The PBoC has tightened interest rates in hopes of keeping inflation in check, so it is not very likely stimulus will be offered to the economy unless the it shows significant signs of slowing. Instead, the Chinese central bank may view a global recession as a welcome sign, which may do what it could not do itself, i.e., slow commodity prices. The world is also on Fed watch, as the FOMC has a one-day meeting today. Since the Fed cannot go lower with rates, investors will wait to see if they craft some sort of fresh stimulus. The US central bank may be a bit gun-shy with stimulus after previous efforts failed to stimulate the economy and only attracted criticism of the Fed's actions. Copper prices may suffer additional losses if the Fed is too passive or too aggressive with stimulus.
Technical Notes
Turning to the September Copper chart, we see prices completely collapsing since hitting multi-month highs over 4.50. Prices are now on the verge of testing support at the 3.90 level. Failure to hold here suggests declines to 3.75 or lower are possible. The violent price action of the past week has caused the RSI indictor to dip into oversold territory. If the market is able to hold support, prices could rebound in the short-term, possibly testing resistance near 4.15.
Rob Kurzatkowski, Senior Commodity Analyst
