What are Copper and Oil Signaling?

With the markets in turmoil, investors are looking for indicators that will help clean their crystal balls.  Two of the more widely used economic indicators are copper and oil. Copper is often referred to as Dr. Copper, because of its ability to give insight to the future of the global economy. Oil is often seen as the lifeblood of the economy since it is used in everything from plastics to finished motor gasoline.  Recently, copper and oil have given investors reason to worry.

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On Friday, copper fell to its lowest level in over a year.  Copper prices are down nearly 19% in only a week as the Federal Reserve announced, “There are significant downside risks to the economic outlook, including strains in global financial markets.”  Copper had been relatively stable this year with demand strong in foreign markets.  However, China, once considered the country to keep demand in commodities high, continues to slow its economy.  In addition to the HSBC preliminary PMI survey that showed China’s manufacturing may shrink for a third month, Freeport-McMoRan’s CEO gave a concerning outlook for copper. Richard Adkerson said, “A China slowdown has more of an impact than anything else.”  He goes on to describe copper as a window for the global economy, and expects slower growth rates to continue.  FCX is the world’s largest publicly traded copper producer, with operating, expansion, and growth projects in the copper industry.  Copper also received additional pressure this week due to a decline in housing starts.  Housing starts dropped 5% to a seasonal adjusted rate of 571,000 units.  It was the largest drop since April.

Although falling oil prices will offer some relief to consumers at the pump, the rapid decline this week has investors on edge.  Last week, light crude oil traded near $90, but fell to an intraday low of $77.55 on Friday.  It was the lowest intraday low since August.  With global growth concerns increasing, brent crude has declined nearly 7% since last week.  Also, oil companies such as Exxon Mobil and Halliburton are now trading at new lows for the year. On Tuesday, the IMF cuts it global growth forecast for this year and next.  The IMF stated, “The global economy is in a dangerous new phrase.  Global activity has weakened and become even more uneven, confidence has fallen sharply recently, and downside risks are growing.”

Copper and oil both appear to be warning the markets that a global slowdown is underway. Equities are also signaling this as the Dow just finished 6.4% down last week, its worst week since October 2008.  Furthermore, copper and oil are signaling that investors have lost confidence in the Federal Reserve’s ability to stimulate the economy through Operation Twist.

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