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Is the copper price pointing to an economic recession?


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Copper prices have recently moved into bear market territory, warning of slowing economic growth and possibly a recession.

CopperSource: Bloomberg
 
 Shaun Murison | Senior Market Analyst, Johannesburg | Publication date: Monday 04 July 2022 

Copper prices fall

Copper prices have seen a dramatic fall from all-time highs realised as recently as March this year. The industrial metal has now declined roughly 26% from these levels to trade at lows last seen around a year-and-a-half ago.

Copper a leading indicator of economic health?

The metal is often considered a leading indicator of economic health due to its plethora of applications across a broad range of industries. That being said copper prices are of course also subject to normal supply and demand dynamics in the market place.

Why is copper trading lower?

The recent decline in copper prices has followed softer demand as China, the world’s largest consumer of the metal, was in a hard lockdown for the two months to June 2022.

The country's zero-tolerance policy towards the pandemic has seen some lockdown restrictions (while more modest) being renewed in its Anhui province at the moment.

Adding to pressure on the copper price has been a stronger USD. An accelerating pace of monetary tightening in the world’s largest economy has seen the greenback strengthening significantly over the last few months to weigh not only on copper by metal prices in general.

Tighter monetary policy globally (particularly in the US), the ongoing war, and disruptions to Chinese business activity are now warning of slowing economic growth, with the threat of an economic recession.

Copper prices are currently digesting this information with the resulting effect being the metal moving into bear market territory (more than 20% off recent highs). In turn the suggestion is that copper, as a leading indicator of economic health, is warning of an impending recession.

Copper – technical view

Copper chartSource: ProRealTime

 

The price of copper, after trading in a broad range between levels $8900/ton (support) and $10770/ton (resistance), has now see a sharp move below support.

The downside break of the $8900/ton level, and subsequent move lower, suggests a new downtrend is emerging as the price makes a series of lower highs and lower lows. $7710/ton and $6970/ton are further downside support targets from the move.

It should be noted, however, that the copper price currently trades in oversold territory. Traders looking to short the commodity price might prefer to look for a rebound from oversold levels before doing so. The short bias remains favoured as long as the $8900/ton level remains resistance.

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