Globe Investor 14 January 2015: Breaking Views by Edward Hada
Copper meltdown could be a harbinger of stock market woe
Sharp daily moves in the price of financial assets are exciting and sometimes meaningful. The early morning slump in the price of copper Wednesday is a sign of both the weakness of the global economy and the power of global disinflation.
Analysts scrambled to explain the sudden fall, which helped wipe 6 percent off the market capitalisation of London’s six largest quoted mining companies. Some purely technical factors were almost certainly in play. For example, a key line on a price graph may have been crossed and that may have led some Chinese companies which use copper as a quasi-currency to speculate on the yuan.
Fundamentals are more powerful. On the one hand, copper prices are supported by supply that analysts at Barclays and Bernstein expect to be tight this year and tighter in 2016. Many expansions of production have been delayed and big new mines are scarce. Barclays calculates that Wednesday’s price is low enough that 7 percent of total production will not even cover operating costs.
On the other hand, investors and traders are swayed by signs of slowing demand from China, as construction falls off in the world’s largest copper market. There are no signs of enough GDP growth elsewhere to compensate.
Copper’s price fall also suggests that it has lost its immunity from the global disinflationary tide, which has gradually eroded wage and price increases in most countries, has crushed bond yields and has recently swept over oil. If copper succumbs, it will be a sign that in the disinflationary world even barely adequate supply doesn’t keep price pressure away.
Equities are the last rock standing. The MSCI World index is down less than 5 percent from July’s all-time high. But many shares are vulnerable. The commodities sector is in disarray, lower prices for almost everything are tough on the finance business, and GDP growth is disappointing. Besides, the rise of disinflationary psychology could make investors more price-conscious. The copper meltdown could be a harbinger of stock market woe.
