TALKING TECHNICALS

Industrial metals index and US treasury yields show worrying trends

Dr Copper has historically been a good indicator of the health of the global economy, due to its use in all forms of technological advancement and economic growth.

But a broader measure than just copper is presented by the Bloomberg industrial metals index, made up of copper, zinc, nickel and aluminium. These four metals are used in various industries so this index is arguably a more diversified read of the demand for industrial metals and economic activity.

The index was strong through 2016 and 2017 but began to falter in mid-2018.

It broke down below the 50-week moving average and below the rising trend in the middle part of 2018, and it has been unable to regain the 50week moving average since then.

The index has tested lateral support in the area around 110 several times since early 2017. However, each successive bounce off that lateral support level has resulted in a lower high forming. The underside of the 50-week moving average as well as the downtrend from mid-2018 have acted as resistance on each bounce over the past year. A pattern of lower highs and flat bottoms like this indicates that sellers have the upper hand and that eventually the price will resolve to the downside, and break down below the flat support zone.

This scenario is looking increasingly likely. A break down and weekly close below the 110 support area will be a bearish break that will point to potential for the index to fall to the 2016 lows at around 90. Given that this index provides a useful barometer on the health of the global economy, it is concerning that the technical structure is looking so vulnerable.

Perhaps all is not so rosy and the US Federal Reserve’s recent decision to start a ratecutting cycle may be preempting a slowdown in global economic growth.

US Treasury yields have fallen sharply this year. This time a year ago several commentators were predicting that the US 10-year treasury yield was poised to move towards 4%; now the market has turned around sharply and yields have gone into free fall.

Treasury yields and treasury prices move in opposite directions. So what the recent sharp fall in yields indicates is that there is huge demand for treasuries that has pushed the price higher.

The sudden rush into treasuries has been accompanied by a fall in the US equity market. It’s a clear sign of nervousness that has come about following the first US rate cut in several years, and also as US President Donald Trump recently announced an escalation in the trade war with

China. An additional 10% tariff was recently imposed on a further $300bn worth of Chinese imports into the US.

The buying of treasuries is an indication of a move into safe haven assets. Technically the break below 2.10% on the 10-year treasury yield was significant and it now looks as if yields are likely to continue to move lower over the medium term. The technical break below 2.10% now points to a move down to 1.40% on the US 10-year treasury. ●