STRONG DATA FROM CHINA BOOSTS COPPER -- FREEPORT MCMORAN COPPER & GOLD IS BREAKING OUT -- STRONG AUTOS ARE GOOD FOR COPPER -- GM AND TOYOTA LEAD AUTO RALLY -- AUTO DEMAND IS ALSO HELPING PLATINUM AND PALLADIUM
COPPER PRICES HIT FIVE-MONTH HIGH... Copper prices are turning in a strong performance. Chart 1 shows the September 2014 futures contract (^HGU14) climbing sharply to reach a five-month high (see arrow). The industrial metal has also climbed over its 200-day moving average. Chart 2 shows that rise also being reflected in the iPath Dow Jones-UBS Copper ETN (JJC). The rise in copper carries a lot of implications for the direction of commodity prices, copper shares, and the global economy. Strong global manufacturing data increases the demand for copper which is a play on global strength. This week's stronger manufacturing data in the U.S, UK, Japan, and China are giving it a big boost. Today's copper gains are most likely coming from strong data out of China, and a strong Chinese stock market. Copper is also getting a boost from strong data in autos and homebuilders, which are big users of the industrial metal. Chart 3 shows China iShares (FXI) climbing sharply to reach a new seven-month high on the back of strong economic news. China is the world's biggest importer of China. As a result, its stock market is closely tied to copper direction.
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Chart 1
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Chart 2
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Chart 3
COPPER AND CHINA ARE HIGHLY CORRELATED... Chart 4 shows a close visual correlation between China iShares (red bars) and the price of copper since 2007. Our main concern here is the period since 2011 when both markets peaked together (see circles). Since 2011, Chinese stocks have been among the weakest in the world (-3.5%). Emerging markets in general did slightly better with a loss of -1.5%. By contrast, the U.S. rose 56% and developed markets outside the U.S. 33%. During that period of Chinese weakness, copper lost -28% versus a -7.6% loss for the CRB Index. That made copper one of the worst performing commodities during those those three and a half years. Those negative trends, however, may be taking an important turn for the better. China iShares are moving up to challenge a resistance line drawn over their 2011/2013 highs. An upside breakout would would be bullish for China. At the same time, the spot price of copper (plotted through yesterday) is also testing a major resistance also going back to 2011. It wouldn't surprise me to see both resistance lines broken. That would also be good for stocks tied to copper, and industrial metals in general.
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Chart 4
COPPER STOCKS ARE TURNING UP... Arthur Hill showed a recent chart of the Global X Copper Miners ETF (COPX) in the process of bottoming. That process is now complete. Chart 5 shows the COPX climbing above its autumn highs to register an upside breakout. The COPX is made up of global stocks that mine copper. Its relative strength line (solid line) is also turning up. The biggest U.S. stock is Freeport McMoran Copper & Gold (FCX). The weekly bars in Chart 6 show FCX breaking through its late 2013 high, which would put the copper stock at the highest level in a year. Its bear market that started in 2011 ended during the third quarter when it broke a resistance line starting in 2011. This week's upside breakout would signal the start of a new uptrend. Material stocks are one of the day's strongest sectors. FCX is one of the big reasons why.
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Chart 5
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Chart 6
GM AND TOYOTA LEAD AUTOS HIGHER... Auto sales hit an eight-year high during June. That news give a nice boost to the group which had already been rallying. Chart 7 shows General Motors (GM) climbing to the highest level in six months. It's also exceeded its March high and its 200-day average. Chart 8 shows Toyota Motor also trading at a six-month high. [Toyota is also getting a boost from a stronger Japanese stock market and weaker yen]. Autos use a lot of copper. They also use platinum and palladium as catalytic converters. That may explain their recent rise.
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Chart 7
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Chart 8
PLATINUM IS ALSO BREAKING OUT... The daily bars in Chart 9 show the spot price of platinum breaking out to a new 10-month high yesterday. Platinum is used for catalytic converters in the manufacturer of automobiles (to contain exhaust fumes]. The strong auto sales reported this week no doubt contributed to yesterday's strong action. Palladium is also used to filter exhaust fumes in autos which may explain its strength as well. The weekly bars in Chart 10 show palladium near a test of its all-time highs formed during 2011. Both metals have benefited from labor problems in South Africa (which have since been settled) and supply concerns from Russia. That being said, I view their recent strength (along with copper) as a sign that the global economy is getting stronger. That's good for global stocks, and emerging markets (like China) in particular which have been global laggards. Rising industrial metals also bolster the view that commodity prices should start to do better in the months ahead. Unfortunately, those stronger trends are bad for bonds.
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Chart 9
