Dr. Copper: “Not panicking”

The copper price sends a message to investors. The future is looking brighter again, but new challenges are emerging.

A guest blog by Nico Pantelis@Slimbeleggen

Summer has begun, although you wouldn’t necessarily think so if you were watching the weather forecast these days. Still, there are plenty of signs pointing to it. Not only do most people have time off, but there’s also a lull in the news and weaker stock market activity. This year is no different: investors are leaving the trading floor in droves. But their stock market screens are closer than ever today. Laptops, tablets, smartphones… the markets are accessible anywhere and anytime. This means that reactions to unexpected news can occur more quickly. Last week was one such moment, when the Portuguese bank Banco Espírito Santo appeared to be running into payment difficulties. Stock prices immediately plummeted.

It turned out to be a storm in a teacup, though, because the commotion has since died down. Still, investors these days are keeping a closer eye on the markets, even during the summer months. That’s true for us, too. We closely monitor our favorite stock exchanges and stocks, even as we’re enjoying the sunshine somewhere on a southern terrace or a warm beach. Our smartphones are always at the ready. That has its pros and cons. There’s less of a chance for true relaxation, but then again, it’s our job. The advantage is that you can closely track (new) market movements. Take, for example, the recent spike in copper prices. Back in the spring, we pointed out the sharp drop in the price of copper. On the one hand, there were the expected financial obligations related to copper in China, but on the other hand, there was also the risk of a potential economic slowdown. And Dr. Copper was right once again: the U.S. economy contracted by nearly 3 percent in the first quarter!

U.S. GDP, Q1 2014

That’s quite a blow for an economy that, until recently, had been posting fairly robust growth in recent years. So the plunge in the copper price didn’t just come out of the blue. Meanwhile, Dr. Copper is back on the mend. After all, copper has rebounded sharply in recent weeks. The price is once again flirting with the 3.3 USD/pound level, which is at the upper end of the sideways trading range (since 2013). Moreover, the copper price is once again trading at

Meanwhile, the market is at a loss as to what to make of it all. We read conflicting reports about the copper market almost every day. At times, market participants point to an improvement in the copper sector due to rising demand from China. That is why the government of Chile, the world’s largest copper producer, recently raised its average copper price from 3.05 USD to 3.12 USD for 2014. Other observers, however, take a more pessimistic view of copper. For example, investment bank Goldman Sachs expects the price to fall as a result of lower demand from China. The cause is said to be a weakening Chinese housing market, combined with the “aftermath” of the unwinding of financial deals involving copper. The investment bank forecasts an average copper price of 2.8 USD per pound for 2014. But not all investment banks share the same view on the copper market. Morgan Stanley even anticipates shortages emerging. Their price forecast stands at 3.2 USD for this year.

To sum it up briefly: no one has any idea where copper prices are headed. But in our view, that isn’t the most important conclusion. What matters most is that Dr. Copper is indicating today that the economy is not heading for another recession. And this message runs counter to the general negative sentiment. After all, while most investors fear for the future, we still don’t see things as quite so bleak. You’ve likely already gathered that from our columns here over the past few weeks. Moreover, we foresee rising inflation. That, too, could be Dr. Copper’s hidden message. After all, we’re seeing more and more signs pointing to an inflationary period. Just take a look at Deutsche Bank’s chart on wage inflation (Source: Business Insider).

wage inflation DB

Although it’s still a bit too early today to connect the various messages, more and more points are being linked together. Dr. Copper’s message seems clear: “There’s no need to panic for now.”

As we’ve shown before, it’s always a good idea to listen to this financial and economic expert, because his judgment is usually spot-on. Today, copper has a more positive message for the global economy: we don’t need to worry too much just yet. That, in turn, is good news for the many concerned investors. We’ve mentioned this here before: the path to higher stock prices is still open, despite the massive rally of recent years. Of course, vigilance is always called for, because the higher the climb, the deeper a potential fall. But as long as central bankers are handing out financial safety nets, a hard landing won’t happen. Until further notice, there’s no need to be afraid of heights. So enjoy your summer vacation!

Source:Standaard.be