Copper Isn’t Far From 2009 Levels After a Week of Chaos

(Bloomberg) -- The mood in financial markets may be like 2009, but in reality most risk assets, like stocks and high-yield credit, are far away from those depths.

Copper is an exception. For weeks, the metal had been insulated from the chaos hitting broader financial markets, but now it’s arrived in full force. Prices sank 12% this week, and with another day or two of intense selling, it’s not hard to see the market back at 2009 levels.

“Everyone has gone into survival mode,” George Daniel, a portfolio manager at Red Kite Capital Management, said by phone from London. “The priority for people right now is to avoid making any stupid mistakes, so they’ll still be around to catch the move higher when this thing ends.”

The risks for investors were plain to see on Thursday. Copper sank 7.9% during the Asia day, before rebounding to $4,786 a ton in London. As with yesterday’s move, that was one of the biggest intraday swings in the past decade.

Here are a few key things to watch in copper:

The Big Demand Question

Even for seasoned traders, it’s impossible to know how the coronavirus will affect demand. The manufacturing sector hasn’t seen cutbacks like this since the financial crisis, suggesting the global economy is entering a recession.

But if the virus threat diminishes, factories could quickly ramp back up. Colossal government stimulus programs will also drive demand. In China -- which consumes half the world’s copper -- there were no new virus cases reported on Thursday.

“In terms of understanding the short-term supply-demand dynamics, uncertainty is the highest I can recall,” Mark Hansen, chief executive officer of metals trading house Concord Resources, said by phone from London. “China responded more forcefully to the economic downturn in 2015-16 than it has now, which is both curious but also should give hope to resource demand possibly returning strongly, at some point.”

The Dollar’s Crush

Copper’s fate is hitched to the dollar, which has rallied to a record high against a basket of major currencies.

“The strength of the dollar is wreaking havoc on our metals complex,” Michael Cuoco, head of hedge-fund sales for metals and bulks at INTL FCStone, said by email. “Until the de-risking subsides and enough forex swap lines allow dollar-starved emerging markets to breathe, we believe selling pressure will persist.”

Cheap Oil

On the supply side, plunging crude prices are rapidly bringing copper miners’ costs lower. That makes it less likely mines will shut down and removes a pillar of support that would typically help prices snap back.

Volatility

The stresses being felt in other areas of the financial market are now bearing down on copper.

While the sharp move lower has been a boon for algorithmic funds who have been chasing prices, the severity of this week’s move is likely to be prompting managers to scale back their exposure, according to Keith Wildie, head of base metals at R.J. O’Brien.

“Volatility has reached levels that in my view are unsustainable,” Wildie said by phone from London. “Systematic funds could see an aggressive reversal in recent market movements lower, which would lead to significant losses on short positioning.”

©2020 Bloomberg L.P.