Thursday, March 13, 2014

Professor Copper is Turning Bearish (excerpt)

Copper is back in the headlines. “Professor Copper” is the metal with a PhD in economics. The copper price is widely viewed as a great coincident indicator of global economic activity. Its price has dropped sharply in recent days, raising concerns that the global economy may be doing the same. Let’s have a closer look:

(1) I much prefer the CRB raw industrials spot price index, which includes copper and 12 other commodities. Not surprisingly, the price of copper is highly correlated with the CRB index. However, the two have diverged over the past year, with copper down 18% since the start of 2013 while the CRB index barely changed. And it hasn’t dropped along with copper in recent days. That’s encouraging.

(2) On the other hand, the recent drop in the price of copper is yet another signal of trouble for emerging markets. Previously, I’ve noted that the CRB index is highly correlated with the Emerging Markets MSCI. Well, the price of copper is even more highly correlated with the EM MSCI.

(3) The same can be said for the China MSCI: The price of copper is also highly correlated with this index. Indeed, much of the recent weakness in the copper price is attributable to mounting signs of a slowdown in China, particularly the 24% plunge in the country’s exports during February. As I noted yesterday, much of that drop is likely an aberration related to the Lunar New Year. In addition, copper has often been used as collateral for borrowing money in China. The authorities seem to be clamping down on that practice, which might also explain why copper has been weaker than the CRB index over the past year.

Today's Morning Briefing: Not So Hot. (1) Agreeable meetings in California. (2) Disagreeable world economy. (3) 1990s all over again? (4) High-Tech Revolution remains US-centric. (5) Stay Home vs. Go Global. (6) Professor Copper is turning bearish. (7) CRB commodity index is holding up. (8) OECD leading indicators still upbeat about US, Europe, and Japan. Downbeat on BRICs. (More for subscribers.)

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