Can copper show the true way out of the crisis?

Can copper show the true way out of the crisis?

23 November 2020 from CarlsquareReading time: 6 minutes

As a scratchy record, we have said since 2009 that the market is governed by central banks’ support purchases. Nothing will change in the foreseeable future. But it is also interesting to see when GDP has fallen by 20-30 percent in many countries, the industrial metals have become hot. Can they show a way out of the crisis?

As everyone knows, Covid-19 has reduced GDP worldwide. It is not the disease itself that has done this, but the strategy of introducing lockdowns. The debate over whether this was the right strategy or not is likely to continue for many years to come.

Economic data is now coming in strongly in the United States, prompting the Atlanta Fed to adjust its GDP estimates for the fourth quarter to 5.6 percent growth.

At the same time, estimates in the market from, JP Morgan show a fall in GDP during the first quarter of 2021 by 1 percent, which would be a double dip. But since the comparative figures in 2020 will be so grotesquely low, GDP 2021 is likely to be a fantastic strong year with GDP figures of around 5 percent per quarter throughout the year…

The reason for the optimism is that most countries in the world stimulate their own economies to counteract the negative effects of the pandemic. While this undoubtedly counteracts the negative effects, it creates a rapidly increasing indebtedness globally. The United States goes from a debt ratio of 100 percent of annual GDP to 140 percent, with a continued high growth rate.

The winner of this will be the stock exchanges, which are listed at an ever-higher value compared to GDP. In the general discussions, it is pointed out that this is Warren Buffett’s favorite indicator to show when the stock market is overvalued or not. Although this is an interesting measure, alongside many others, it is too blunt to trade on. The world is now going through a crisis that has been predicted by many, but which we have not experienced before. AIDS, bird flu and swine flu lead to large deaths, but no lockdowns were carried out for them. The single cause for lockdowns does not seem to be mortality per se, but the enormous strain on the healthcare. With record-breaking vaccine production, it may also prove to be the best strategy.

The S&P 500 index is now trading right below an earlier peak. Note that EMA9 is still an important support, like a first line of defense. Note however how EMA9 has lost its upwards movement implying a lost momentum. In case of a break below EMA9, the 3 500-level serves as a second support followed by MA20:

Given the sector rotation, out from growth and tech in favor for cyclical stocks calls for a phase of consolidation.

Apple stock is a good benchmark for this consolidation. Will the stock break up or down the wedge? The season speaks for a break upward which would give the stock an opportunity to test a previous top. Of course, it is negative if there is a setback on the virus-front or if the conflict betweent the United States and China escalates further. A break to the downside would give the stock an opportunity to test MA 200:

Nasdaq index is trading in a similar consolidations-formation:

The sector rotation has been in favor for OMXS30 index that is currently trading above its previous top from February. Note that momentum is falling in the MACD histogram. EMA9 is however still trading upwards and serving as a first level of support along with the previous top:

DAX index seem never to be able to take out the gap from February. But rising EMA9 give some hope at least, even though the MACD histogram indicates a falling momentum:

But the big thing that is happening right now is occuring in the raw material sector.

The graph above shows how Bitcoin has been much stronger than the gold price recently. The gold price is trading in a falling wedge. Though a test of Fibonacci 38.2 seems to be almost in the cards if not energy can be created to break out of the wedge on the upside:

The rise in Bitcoin price can be explained by an escape from fiat currencies where rising debt testifies to future inflation and uncertainty. Bitcoin certainly has a connection to China and the interest in moving funds away from state control there.

But this is not enough as an explanation. The entrances are reflected in the entire complex with industrial metals. The copper price is traded steadily upwards as shown in the weekly graph below. Apparently, China, as the world’s largest importer, has come to a lift again. 

But also, in the spot market, the price is driven by optimism about new vaccines. On the supply side, there are also several disruptions. Chile and Peru are hit by Covid 19 and in Chile there are several ongoing strikes that are hampering production.

There are several fundamental reasons why copper prices may rise in the coming years. There is a clear trend that copper producers are getting less and less copper from existing mines.

At the same time, the number of new discoveries of copper deposits in the world is declining, despite rising copper prices and despite rising budgets for copper. See the full series of graphs at: https://www.visualcapitalist.com/coppers-supply-chain/

The graph below shows the copper prices from 1999 in a monthly graph. Note how the metal just passed up above MA200 and the top from 2018 (in line with Fibonacci 50) is now being tested. In other words, there are very strong reasons to keep an eye on this metal, which is a very important input in all electronics. As all the world’s electricity production is switched to more fossil-free alternatives, a new demand for electricity lines is also being created as the world’s electricity grid must be redesigned. Given that the underlying economy growth remains, demand will be high.

Just like Bitcoin, the price of copper has outperformed gold recently:

Nickel is another important input. The nickel price has not broken up but is still traded in consolidation.

As shown in the weekly graph below, Shanghai Aluminum just broke up above Fibonacci 61.8. Is the previous top next?

In the weekly graph for Zinc, one can see how the metal is wrestling with MA200 and Fibonacci 50. A break to the upside and the 22 610-level may become next:

Brent oil shown in the weekly graph below closed last week up above MA200 and Fibonacci 50. The next level can be found around 50 USD/barrel:

It is not possible to trade commodities without looking at the USD. This is because all raw materials are priced in USD. A falling USD thus in itself provide support for raw material prices. Note that EUR/USD-pair is trading on a very strong support. A break upwards means new energy to commodity prices. A bounce probably gives lower input values. A setback for the vaccines, or geopolitical conflicts with a rising USD, will result in declining commodity prices.

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This information is in the sole responsibility of the guest author and does not necessarily represent the opinion of Bank Vontobel Europe AG or any other company of the Vontobel Group. The further development of the index or a company as well as its share price depends on a large number of company-, group- and sector-specific as well as economic factors. When forming his investment decision, each investor must take into account the risk of price losses. Please note that investing in these products will not generate ongoing income.

The products are not capitalprotected, in the worst case a total loss of the invested capital is possible. In the event of insolvency of the issuer and the guarantor, the investor bears the risk of a total loss of his investment. In any case, investors should note that past performance and / or analysts' opinions are no adequate indicator of future performance. The performance of the underlyings depends on a variety of economic, entrepreneurial and political factors that should be taken into account in the formation of a market expectation.

18/04/2021 11:27:34

 

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