Dr. Copper says the outlook for the global economy isn't good and his colleagues concur. Commodities prices are in full retreat, signaling weakness around the world, even as policy-makers pull out all the stops to keep their economies from faltering further.
Notwithstanding the best efforts of policy-makers on both sides of the Atlantic, commodities markets are pointing to weakening economies in the U.S. and abroad. Copper, which is ubiquitous in a broad range of consumer and capital goods as well as construction, is the ultimate harbinger of trends in goods-producing industries. So acute is the red metal's sensitivity to business trends that it has been dubbed Dr. Copper, in recognition that it is the commodity with a PhD in economics. That's a misnomer since copper can call economic turning points better than most academics, many of whom prefer to dissect the past rather than try to figure out the present, let alone where we're headed.
What is incontrovertible is that copper traded at its lowest price of 2011 Thursday, and much of the commodity complex followed suit. The Standard & Poor's GSCI commodities index was down 9.8% for the third quarter with a day to go, according to Bloomberg. That would be the most severe decline since the fourth quarter of 2008 in the grips of the near-meltdown in financial markets and a freefall in global economies.
The fall in copper to its lows of the year is a "sobering omen for global growth expectations," writes Michael Darda, chief economist and market strategist at MKM Partners. For those of you playing at home, the iPath-UBS Copper exchange-traded note (ticker: JJC) plunged more than 7% Wednesday and is down by nearly a third from just the beginning of August.
"Copper is a bellwether for global demand and has been highly correlated to the S&P 500 over the last two years. That it's cracking to new lows for the year [Wednesday] (along with Chinese equities) is noteworthy, Darda writes in research note.
"Why is this happening? It looks like some kind of liquidity squeeze is under way in China," he continues. The sharp widening in credit spreads for China implies as much. Spreads have gapped to the widest levels since the fall of 2008 and the summer of 1998, ahead of the credit crisis that began in Asia the previous year and culminated in the Russian debt default and the Long Term Capital Markets collapse.
While the plunge in copper and other industrial goods portends poorly for the world economy, the outlook for all commodities isn't dire. F. Mark Turner, chief investment officer for Pentagram Investment Partners, draws a sharp distinction between "soft commodities," such as agricultural goods, and "hard" industrial commodities. 2008.
"In the soft-commodity area, notwithstanding some bumper harvests, ending stocks remain at critical levels. China is no longer self-sufficient in food production and relentlessly pursues deals to secure access to food production. We favor a strategy of being long soft commodities and being short industrial metals against them," Turner writes in a letter to clients.
More than it might be supposed. Prices of commodities are highly sensitive to changes in demand. Supply is relatively fixed in the short-term; you don't just open and close a mining operation based on the latest futures market report. So, prices can drop relatively sharply in reaction to weaker demand. That's why copper is watched by investors who aren't interested in the metal per se.
But, as Darda points out, copper has been highly correlated with the S&P500. That should be sufficient reason for investors to pay attention to the metal with a PhD in economics.