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Mish's midweek update: When Dr Copper Speaks, We Listen

Mish's midweek update: MarketGauge's Mish Schneider offers her expert analysis of US markets.

As prices rise for petrol, groceries, new homes and travel, the copper futures market tells a different story. Recent personal consumption expenditures (PCE) numbers show declines in auto sales, particularly used cars and other durable goods. Basically, the decline in expenditures is attributable to non-essential goods.

However, household expenses were taken up by rising costs for essentials such as food, energy and housing. Copper has many uses including home appliances, power generation and cars. Of special note is its use in electric vehicles (EVs).

Copper is also a key metal to build out the infrastructure for delivering renewables and low-carbon energy. Estimates show that 1.1-1.2kg of copper are consumed for every kilowatt hour of lithium-ion battery use. IDTechEx forecasts that by 2027, 600 kilotonnes of additional copper will be needed to match this demand.

In June, I wrote that inflation had not peaked and the worst was still to come. However, one thing we have learned through our decades of trading experience is to look at price first and foremost. Prices for copper futures peaked in late March. Since then they have fallen from $10,230 per tonne to $8,035 per tonne, a stunning decline of 32%.

Recession concerns

Global recession fears have dampened the demand outlook for commodities. Yet the biggest factor in the recent commodity price slide is not necessarily the real cost, but rather the fear that the Federal Reserve, convinced the US economy is strong, will continue to raise interest rates. Secondly, demand destruction, as seen in the PCE figures, is adding to fears of recession. Something has to give.

US Treasury long bond yields have fallen from their peak. If the Fed is concerned about inflation, yet the market is saying recession while yields fall, the dollar rises and commodity futures collapse, can Dr Copper help sort this out for us? 

Are we going into recession, stagflation, recovery, hyperinflation, or is this just a free for all where you shut out all news and just look at the charts, as if we lived under a rock?

Copper is a metal that has been with us since the dawn of civilization. The Romans used it to build their empire, and its high thermal and electrical conductivity led to the development of electricity generation in the nineteenth century and a revolution in telecommunications. But extracting copper has always been very damaging to human health and the environment.

Copper prices to rise? 

It's not easy to ramp up copper production, due to the upfront cost and lead time in getting new mines online. So with rising demand, supply should remain really tight.

There is no substitute for copper. With its importance role in EV production, unless a technical advancement replaces copper, Goldman Sachs thinks it could more than double in price from current levels.

The above chart and our proprietary indicators suggest that copper futures are deeply oversold and subject to a significant mean reversion. It can be argued that demand destruction is temporary. Hence, we will monitor the price action closely to see if copper returns to $3.55 per pound, using the continuous contract as a guide. 

As occurred in the 1970s, dislocation of price while countertrends occur is not unusual. The market can have competing forces as in the case of the commodities market, versus the reality of the PCE, PPI and the price of copper. 

Mish’s ETF support and resistance levels

S&P 500 (SPY) 378-380 support zone after a rocky start
Russell 2000 (IWM) Support is 170, needs to clear 174 to stay in the game
Dow (DIA) 307 support, needs to clear 315
Nasdaq (QQQ) 282.50-283 pivotal, 290 resistance
Regional Banks (KRE) 56 the 200-WMA, 60 resistance
Semiconductors (SMH) If yields stay lower, it could rise above 200
Transportation (IYT) 211.90 support, resistance at 220
Biotechnology (IBB) Our leader and possible saviour as in 2009, it was the first ETF in this list to bottom. Now needs to hold 120
Retail (XRT) Respected the inside day and broke out over 59.24 now support

Mish Schneider is MarketGauge’s director of trading education and research. Read more of her market analysis here.

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