Economic barometer falls as equities touch new high
Rising divergence between copper prices and rallying global equities proves that the former are driven by loose liquidity rather than stronger turnaround in economic activity. Copper, the barometer of the global economic developments, is on a decline for over a year and equity indices worldwide have risen, and in some cases have reached multi-year high. This deviation is the result of slack liquidity that unlike the period of 2008-2011, has chosen equities as preferred asset class over commodities.
Since February 2012, when the second round of LTRO (Long Term Refinancing Operation) was announced by the European Central Bank (ECB), there has been a stark difference in the movement of global equity benchmarks against that of the copper. After RBI announced lending $712 billion to financial institution for three years, the LME (London Metals Exchange) 3M forward copper fell about 9% to $7690 per tonne while the MSCI world index has gained more than 10% during the period. Meanwhile, Dow Jones Industrial Average touched its all-time high of 14296.24 on Wednesday.
This mismatch appears one of its kind given in the last decade, copper has always acted as a lead indicator of the global economy and at least on five instances, it headed the recovery in equity markets, including the turnaround in markets in March 2009 during the post Lehman financial crisis. After plunging by more than 65% in 2008, copper prices started to recover in early 2009 and equity market followed suit in March 2009.
The blame thus falls on the investor interest in the commodity which when gauged by the open interest of the commitments of non-commercial traders shows a declining participation since 2011. This group consists of those traders which do not have a business interest in copper and hence their positions are not for the purpose of hedging but for speculative gains. Since 2005, copper prices have demonstrated a strong correlation with the open interest of this group of traders.
In the last decade, the copper consumption has increasingly turned dependent on emerging markets. As a result, in a scenario where emerging economies like India and China have lost their growth momentum and developed economies struggle to post meaningful economic growth, copper prices turned muted. As per International Copper Study Group, in the first nine months of 2012, world apparent usage grew by 3.5% y-o-y, driven by a 13% growth in China?s usage. However, the aggregate usage of Japan, European Union and United States reported an aggregate decline of 4.4%.