Wednesday, September 21, 2011

Copper, Oil, & the S&P 500

The price of copper dropped sharply yesterday after the IMF lowered its global growth estimate. It also fell sharply on Monday, down 20 cents over the two-day period from $3.92 cents per pound on Friday to a ten-month low of $3.72 yesterday. It is up at $3.74 this morning, trading 11.8% below its 200-dma. That's bad news because it suggests that this summer’s crisis of confidence caused by the debt messes in Europe and the US is depressing global economic activity. It suggests that the global soft patch is rapidly getting softer, confirming the IMF’s downgrade of the global growth outlook.

Yesterday’s FT reported: “Rio Tinto, one of the world’s largest natural resources companies, has warned that some of its customers were asking to delay shipments of metals, in a clear sign that the financial turmoil is starting to affect the commodities sector.” This is a rather sudden shift from six weeks ago when many mining companies were still seeing plenty of demand for their commodities.

Falling commodity prices are bad for profits and for stock prices. The S&P 500 has been very highly correlated with both the price of copper and the price of crude oil since 2008. The good news is that the price of a barrel of Brent crude oil remains near the year’s high. However, it is down a bit and right on top of its still rising 200-day moving average. Also keep in mind that stock prices may already have discounted the recent weakness in commodity prices. Nevertheless, it’s hard to see much upside for stock prices if commodity prices remain weak. Of course, if they tumble, then there will be more downside for stocks.

If the IMF forecast is correct, then there should be enough global growth to avert a 2008-style plunge in the prices of commodities, including the prices of copper and oil. This doesn’t rule out a retest of copper’s 2010 low of $2.76 on June 7. The price of oil is less likely to retest last year’s low of $69.19 on May 25. That’s because OPEC would cut production if the price weakens much from current levels.

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