We are truly living in unprecedented times. Earlier in the crisis we hit negative yielding interest rates on 13-month Treasury bills. Yesterday the expiring West Texas Crude Oil contract traded negative by $40, along with various other oil contracts in Edmonton, Midland, etc. Up until last week I would have happily bet that Crude Oil prices would never go negative. Taken individually, you can argue away both the Crude drop and negative interest rates. After all we have had negative interest rates in Europe since 2014 and Crude Oil supply issues are not all that new. Taken together we are witnessing the largest economic shock of all our lifetimes. Of all the economic indicators to talk about, Copper remains my biggest focus for real-time economic pulse.
From my first days on the street the smartest traders in the room would always refer to Dr. Copper. I was 20 years old, never been on a trading desk before and the only Doctor I ever saw was an allergist. I figured that this Doctor they kept referring to was some big whig executive they had on the payroll. After a few days of wandering the halls trying to find the office with the last name Copper on the door, I finally figured out they were talking about the commodity. According to Investopedia, "The term Doctor Copper is market lingo for the base metal that is reputed to have a Ph.D. in economics because of its ability to predict turning points in the global economy."
Copper's statistical power of predicing recessions is quite low. Part of that may be due to timing aspect of how the NBER actually quantifies recessions (2 consecutive quarters of negative GDP) or maybe it is more of a coincident indicator. Regardless, there is no question that outside of Oil, Copper is the single most levered commodity to the business cycle. According to the price action, Dr. Copper suggests the business cycle peaked in Q418, simultaneous with the momentum blowup that bottomed on Christmas Eve of that year. While stocks rebounded for one last blow off top through early 2020, Copper has been firmly in a bear market. Most recently, Copper has broken the neckline of arguably the largest head and shoulders pattern I have ever seen.
Zooming in to the daily, the bear market rally that began a month ago was rejected perfectly at neckline resistance the last few days.
Demand destruction for all industrial based commodities is without question. The current dynamic in the oil market proves this is both a supply and demand crisis. Copper does not have the same storage capacity issues that we have with oil, hence negative Copper prices are not in the cards. That said, it does not take a statistics doctorate to see there is a correlation to between the two prices both on outright level and y/y change.
First and second month copper are in Contango by ~$.03. My short term price objective is $1.81 corresponding to the financial crisis low on the June Contract. Longer term objective pushes us below $1 following the '01 cycle.
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