Does copper’s fall predict another global recession?
Wall street folklore is replete with myths, false correlations (hemline and the stock market) and even financial superstition. However, as an investor and market strategist, I am forced to act as a financial astrologer, forced to scan a tsunami of data points to grasp macro trades with an asymmetric risk-reward calculus in my favour. So I naturally track Dr Copper on the London Metal Exchange. The red metal has a reputed doctorate in economics since its price trends allegedly predict the global economic cycle in real time. Poppycock? Not always.
Since early June, the price of copper has declined by a frightening 18 per cent. This could be a leveraged response to a Chinese trade war, a SOS on synchronised global economic growth or panic selling of emerging market risk assets. It is ironic that copper’s free fall has coincided with a hawkish Powell Fed that has anointed US economic growth as “strong” and announced its determination to continue raising the world’s cost of capital. It is doubly ironic that copper’s plunge to $6,000 per metric tonne on the LME has also coincided with the world’s failure to address mine expansion and strikes in Chile.
The copper plunge is eerily reminiscent of the second half of 2008, when shorting Freeport McMoran, the world’s largest listed copper producer, was a licence to print money on the NYSE. The Bernanke Fed keep reassuring Wall Street that the subprime crisis would be “contained” even as contagion spread across asset class and culminated in the failure of Lehman in September. Frankly, in 2008, Dr Copper was a more reliable indicator of the global economic cycle than the chairman of the Federal Reserve. If history repeats itself in 2018, Dr Copper could be an advance indicator for the onset of global recession. When Dr Copper crashes, bad things happen on Wall Street and around the world. It is no coincidence that the Chinese stock market is down 20 per cent and China is the world’s second largest economic colossus after the US. Economic decoupling is a myth. If the Chinese dragon bleeds, the American eagle cannot soar, despite the Fed’s growth conviction. Get real. Get out.
The strength of the US dollar and the seventh interest rate rise in this Fed monetary tightening cycle at the June FOMC has led to new lows in gold in 2018. The yellow metal trades at $1,211 an ounce, down almost 40 per cent from its $1,930 high in September 2011. Gold’s high on January 25, 2018 was $1,368 an ounce when the US Dollar Index was 84.6, a full 1,200 points below its level now. The inverse relationship between gold and the US dollar has been statistically robust in 2018, even as the Trump-Dear Leader Singapore summit has reduced geopolitical risk. Bitcoin’s brutal bear market has not given a boost to gold. The resurgence of the King Dollar trade since April, sharply higher US short term rates, the risks of a US-China trade war, outflows from exchange traded funds and Asian central bank selling all led to the protracted bear market in gold. It is probable that the King Dollar trade will continue to pressure gold this autumn. The financial markets give 90 per cent odds of a Fed rate hike in the September FOMC and 70 per cent odds at the December FOMC. US Treasury bond yields will rise faster than the yields in German, UK and Japanese government debt. If US economic growth accelerates, as the Powell Fed expects after 4.1 per cent GDP growth in the second quarter, the interest rate spread could widen in favour of an even stronger US dollar. This is all the more true since the ECB and the Bank of Japan will not match aggressive Federal Reserve monetary tightening. Since gold provides zero return, a rise in US dollar borrowing costs will continue to hit spot bullion, which can well fall as low as $1,160.
West Texas crude oil has fallen for five successive weeks for the first time since August 2017. US inventories gained 3.8 million barrels, far above the market’s 2.8 million barrel expectation. The escalation of the US-Chinese trade war is also bearish for global growth prospects and thus petroleum product demand.
The Trump White House’s decision to re-impose sanctions on Iran has injected geopolitical supply risk into a tight crude oil market.