Commodities | Aug 16 2012
Economic numbers from China last week and the lack of any follow through on stimulus talks from central banks over the last few weeks has seen some weakness reemerge into the copper market. Although it has been a ranging market for some time we always get nervous at the lower end of the range as the potential for a change in trend is with us. As China is the number one consumer of the metal in the world the price of copper is tied to her economic performance.
Of late the data, whether its was industrial production slowing to 9.2%, its weakest since May 2009, or retail sales falling by 0.6%, and where economic growth has been falling since 2011(7.2%), the story remains the same… the economy is not strong. The numbers when compared with the performance in the western economies are good however, but are weak by Chinese standards. As a result of the weak numbers we are continually suggesting that we will get some stimulus for the Central Authority. This mantra has been with us for some time as it has worked in the past in trading strategies, however it is losing momentum.
Weak numbers equate to stimulus and commodities go higher. However, if you think outside the square why would China want strong commodities, why would it introduce stimulus if only to placate the West? It s an intriguing question, one that it not going to be solved in this article. However, think about the price of copper: what would be better for China’s internal and external economies, whose massive ongoing infrastructure and housing programs will requires tons of metal and will continue to for many years? Would a high price or low price paid for copper be good? The answer will have to be a low price.
As we trade to lower in the range we have to remind ourselves that it is tough trading whilst northern hemisphere summer holiday makers are away from their desks. Volumes are light and this could provide for some hefty moves. Although we are generally bullish the metal, we have to be flexible such that if the economic outlook clouds over, so too must our bullish view for the time being.
We continue to be long at US340, which is just at the money, however technically we are at major support so if this breaks prices can go back to USUS320 then US300.
Chart point
As suggested, copper is in a range US355 is the top end and US330 is the lower end. The consolidation continues however be careful about long positions as momentum indicators are at the top end of the band. A break of US330 potentially opens the way for a move to US300.
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