Investing

Copper Is Losing Its Predictive Power In US Markets

Copper wiring coiled
Credit: Shutterstock photo

Copper is good for more than just pennies. The industrial metal exhibits many properties valuable in construction, infrastructure, and equipment manufacturing. For this reason, copper demand tends to rise when major economies undertake large-scale development projects, as was the case following the recession.

China started to ramp up infrastructure spending to stimulate the economy, causing greater interest in the copper market. Conventional wisdom suggests fluctuations in copper prices precedes change in the stock market and the economy. While there is some truth in that, recent evidence finds copper no longer holds the same weight in predicting market movement.  

Before the recession, the relationship between copper and US equities was infallible. When the price of copper increased, stocks did as well. The red metal served as a reliable measure of economic health in the industrial and manufacturing sector. Its intrinsic qualities plus natural abundance made it an ideal base metal for both emerging and developed markets looking to jumpstart growth.

Meanwhile, many common household items from batteries to electric wiring use copper in one form or another. Today, most copper production originates in Chile and Peru, where the precious metal is their main export and biggest economic catalyst.

Since copper and copper products play an instrumental role in economic growth, it can act as a leading indicator for the stock market.

 

 

This was true in the US until after the recession when China took control of the global copper market. By 2012, China was a leading force in copper trading, as both a consumer and producer of the red metal. It was at that time the correlation between copper and US equities started to break down.

Low interest rates coupled with a strong tech sector helped mount a historic recovery for US stocks, while global copper prices weakened from oversupply and tepid demand. Futures prices of the red metal diverged from the S&P 500 in 2013 and continued to do so for the following years.

By 2016, copper prices hit a near term low despite signs of improvement in the US economy. Correlation between copper and US equities also turned negative, meaning they exhibited an inverse relationship.  

 

 

Now the consensus is copper prices move in tandem with growth expectations in China. Between 2000 and 2015, demand for copper grew by an annual rate of 12 percent during which China was rapidly industrializing. In fact, China consumed about the same amount of copper as the entire western world by 2015.

Yet, rising demand alone couldn’t lift copper prices. It took a synchronized global recovery to prop up the copper market. This bounce in price was called into question earlier this year when it was thought China’s industrialization efforts were winding down. But upbeat manufacturing data in the recent months have eased those concerns.

Moreover, rising interest rates around the world will help sustain the rally in copper. In a rising rate cycle, copper prices will continue to improve because regardless of currency moves, the general economic outlook is brighter.

Copper was once considered a good barometer of economic health in the United States, but lately, that hasn’t been the case. Instead, the base metal has responded to economic patterns in China, the world’s largest consumer of commodities. If demand begins to cool, the next year could look dim for the copper market.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

Trevir Nath

Trevir Nath graduated in 2011 from Rutgers University with a Bachelors in Economics & Psychology. His Psychology and Economics degrees increased his understanding of financial markets from a human behavior perspective. Looking to further his understanding of financial markets, he went on to obtain his Masters in Economics from the New School graduating in May 2014. He currently writes about personal finance, investing and its interaction with technology. His work also appears for numerous financial websites including Investopedia.

Read Trevir's Bio