Fears of a crisis in the emerging markets are keeping the cyclical metals under pressure. Led by copper, prices dropped around 2 percent on average yesterday, reflecting a weakening demand outlook as well as a strengthening US dollar.
Most emerging market currencies are trading at multi-year lows versus the dollar, which lifts domestic metal prices and puts pressure on emerging market consumers while lowering dollar-denominated production costs for the mining companies.
In this environment, copper did not receive any support from the news that mine production in Peru, the world’s number two, was down more than 5 percent year-on-year in July.
This supports our view of ‘macro trumping micro’, i.e. market-specific factors being less relevant as long as concerns about the emerging markets and the trade tensions prevail.
With the expected introduction of more U.S. tariffs on Chinese imports tomorrow and China’s likely retaliation, these concerns are unlikely to fade.
Against this backdrop, sentiment in the cyclical metal markets should remain bearish, keeping prices somewhat below fundamentally justified levels but offering no buying opportunities.
Beyond the impact of the U.S. dollar, we see the shift from bullish sentiment in early summer to bearish sentiment as of today as the main driver of the metal markets’ sell-off. Hence, we believe it is mostly noise but not a harbinger of a looming global recession.
Any opinions expressed here are the author’s own.
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© Opinion 2018
