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'Bellwether' copper slides - EMEA brief 6th July

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JamesIG

  • Trump tariffs now in effect, however markets have generally priced this in.
  • Fed hints at last nights FOMC that it could raise rates twice more this year. Greenback gains removing some of the earlier gains from GBPUSD.
  • Carney warns that Trumps trade tariffs could damage the global economy knocking up to 2.5 percentage points of global growth over three years, but has warned Trump that these tariffs will hurt the US the most. Carney still upbeat about UK growth.
  • New figures show that UK high street retailers could suffer the ‘worst year on record’.
  • Copper extends losses on worries about global growth. The metal, seen as a bellwether of economic health, has hit a fresh 11 month low in London's LME. This week alone the metal has shed nearly 5% which has put it on it's steepest weekly drop since mid November 2017.

Asian overnight: Asian markets were in surprisingly positive mood overnight, as a dovish Fed meeting helped ease any fears over the ramp up in tariffs between the US and China today. The imposition of tariffs on $34 billion worth of goods in either direction have done little to market sentiment, with much of the implications seemingly priced in. However, we have since seen Donald Trump mention the possibility of adding another $300 billion on top of the $200 billion in goods already mentioned in the past. Markets are however gaining despite this trade war result, suggesting that perhaps the news has already been priced in. The rebound in global markets should be treated with caution as we await further retaliation from China and the suggested escalation from the US regarding this matter. Overnight data saw Japanese household spending fall, while average cash holding improved significantly.

UK, US and Europe: A busy day for the US follows a relatively quiet economic calendar in Europe, with one of the main figures already released in the form of the German industrial production number (2.6% from -1.3%). The focus for most will be the US and Canadian jobs report, with markets set to see whether the headline NFP number will follow the ADP figure lower. With market expectations of a September already elevated, todays jobs figures will add another important piece of that puzzle for traders.

South Africa: South Africa's local equity market is expected to initially follow gains in the US and Asia, although could trade tentatively into the US employment data releases this afternoon. South Africa's gold and foreign exchange reserves for June 2018 were reported to have been recorded at slightly lower levels than in the previous month. The rand has managed to claw back some strength today which is expected to aid gains in local banking and retail counters. BHP Billiton is trading 0.85% higher in Australia this morning suggestive of a positive start for local resource counters. Tencent Holdings is up 0.26% in Asia, suggestive of a marginally positive start for major holding company Naspers, although the stronger rand may temper some of these gains. 

Economic calendar - key events and forecast (times in BST)

1159136701_2018-07-0607_59_58-ForexEconomicCalendar.png.19f589cf35a16d7837be7648fa8760ad.png

1.30pm – US non-farm payrolls (June): payrolls expected to fall to 190K from 223K, while the unemployment rate holds at 3.8%. Average hourly earnings forecast to be 0.2% higher MoM, from 0.3%. Markets to watch: US indices, USD crosses

1.30pm – Canada employment data (June): 17,500 jobs expected to have been created, from a 7500 fall in May. Unemployment rate to hold at 5.8%. Market to watch: CAD crosses

3pm – Canada Ivey PMI (June, seasonally-adjusted): forecast to fall to 60.7 from 62.5. Market to watch: CAD crosses

Source: Daily FX Economic Calendar

Corporate News, Upgrades and Downgrades

  • Glencore, the copper, nickel and iron ore mining specialist, announced it will initiate a $1bn share buy back scheme.

  • Stobart said that it had started the year ‘satisfactorily’, and has also announced a new five-year lease partnership with Ryanair. 

  • Rolls-Royce has sold its commercial marine business to Norwegian firm Kongsberg for £500 million. 

Eurazeo upgraded to buy at HSBC
ITV upgraded to buy at SocGen
Petra Diamonds raised to buy at Panmure Gordon & Co
Shell upgraded to buy at DZ Bank

Daily Mail downgraded to sell at SocGen
Direct Line cut to equal-weight at Barclays
Esure downgraded to underweight at Barclays
Pearson downgraded to hold at SocGen

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Please note: This information has been prpared by IG, a trading name of IG Markets Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. See full non-independent research disclaimer and quarterly summary.

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@JamesIG, Copper's recent price action is worrying for world stock markets. I am someone who monitors my investment trusts / investment funds portfolio on a daily basis and I have noticed a drop in my profits over the past week which are more significant than usual. 

Copper is a good indicator of the general health of the world economy and especially economies like China and the US. It is a barometer that can be used to indicate strength in economic growth especially in construction and manufacturing.

They call it Dr.Copper for a reason!

For anyone with large equity portfolios then I would strongly suggest they keep an eye on the price action of Copper. Historically, it has been a useful indicator for things to come in relation to the performance of equities. 

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Has there been any analysis on correlation between copper and the world index markets. 

Ohhh to have Bloomberg and to do the correlation coefficient function once again... 

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I believe there has been analysis on the correlation between a rising Copper price and the increase in GDP and rising world index markets. It is not necessarily always the case that a falling Copper price has meant recessionary behaviour. 

I am sure there is lots of research and articles on the Internet. The key is establishing which are credible sources and taking it from there.

However, I think it would be prudent for one to keep a small eye on the Copper price behaviour. If it continues to decline and so too do equities around the world then I would not worry about historical correlation. There are times when fundamentals meet technicals and historical correlation cannot always be effective in testing any assumptions one may have based on past performance. 

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Absolutely. Maybe this is the start of the cyclical crash... 

hold on folks and be ready to bid on long term diversified portfolios on the way down ;)

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One interesting thing is the last time we have a major correction on a world stage was during the credit crunch / financial crisis which is now over 10 years ago.

Will Brexit create a similar outcome next year? If so then Asian markets may offer more resilience than UK / European markets.

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