E Market Harbingers Like Copper

Copper is supposedly a harbinger of economic health, rising in advance of economic growth and falling in advance of recessions. Some of this simplistic forecasting is overdone, because the price of copper reacts to short-term factors which have nothing to do with economic health and to trading strategies like short selling.

So copper is due for a recovery starting as soon as next month according to the London Metal Exchange. The recent sag in prices is likely to reverse over fear of a strike at the Escondida mine in Chile. If this occurs, the surplus copper and short selling will reverse. But even without a strike the LME says mine supply is expected to deteriorate from last year in H2. In the current quarter, LME cash copper was priced at $6834 per metric tonne, down from $7000 on April 1. However, CU closed at $6714/tonne on June 30, and on July 19 fell to $5988 per tonne, well below the $6200/tonne cost of producing the red metal, before recovering a bit to $6006 at the close.

The reason for the drop is short-selling because of the US and China's trade war. Each country is hitting goods imported from the other with $35 billion of tariffs. These import taxes hit raw material inputs (like copper) more than others.

Citigroup analysts wrote July 19: “The recent s​ell-off is providing a long-term buying opportunity,“ adding that a full scale trade war would push prices of raw materials lower still. However it concluded: “Our base case is that we do not expect a sustained downward spiral in global growth as a result to the trade war.”

In fact US copper scrap markets are already inching upwards because of shortages. Now consensus forecasts for the shortfall of copper supplies for the full year have more than doubled to 129,000 metric tonnes. Unlike general forecasting using copper as simple crystal ball, the LME operates to balance supply and demand for metals every working day.

While the parameters for trading precious metals are broader, because gold has a role outside the production of things, there is some overlap with copper as well. Gold hit a 12-mo low on July 19 at $1214.45 before recovering, the same pattern as was shown by other precious metals.

As for the inverted yield curve as a predictor, that one is even more misleading although the 2 yr to 10 yr US T-bill spread is very flat and may be inverting soon.

Comcast, a stock I own, opted to let Walt Disney win the titans' battle for 21st Century Fox and will instead use its money to bid for Fox's 39%-owned Sky plc in Britain. Both Rupert Murdoch's Fox and CMCSA have bids in for the rest of Sky. I think all parties will find this makes sense, the best outcome for my shares and The Mouse which both rose July 19 while FOXA fell. Sterling, the currency in which Sky is priced, fell below $1.30 for the first time in 10 months.

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