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Global Economy

Bad Omen from "Dr. Copper"

If you want to know how the global economy is really doing, you should take a look at the raw materials markets: the copper price is considered a highly sensitive barometer for the condition of the global economy. "Copper is a pioneer, a leading indicator," explains market expert Robert Rethfeld from Wellenreiter-Invest in an interview with tagesschau.de.

No wonder, since the shiny red industrial metal is used in the electrical industry, mechanical engineering, the construction industry and vehicle construction, among other things. If demand falls here, the copper price falls directly, even before the weakening economy is reflected in falling growth rates.

Disturbing diagnosis from "Dr. Copper"

In the English-speaking world, the term "Dr. Copper" is often used. However, the diagnosis that "Dr. Copper" made of the global economy sounds anything but reassuring. Because the copper price has been in a downward trend since its record high in March; since the beginning of June, the downward momentum has again intensified significantly.

In the middle of the week, the price for the base metal fell to $7,202.50 a ton. Copper has not been quoted this low for a year and a half. Since the high in March, the minus is around 30 percent. Experts see this as a symptom that the global economy is not doing well.

Industrial metals trending down

Commerzbank commodities expert Carsten Fritsch is also convinced: "Generally, concerns about a global recession continue to prevail on the metal markets." Significantly increasing corona numbers in Shanghai would have raised concerns that there would be renewed lockdowns, which would likely affect demand for industrial commodities.

Goldman Sachs lowers target price for copper

Even the experts at Goldman Sachs now have to admit that the tide has changed for industrial metals in general and for copper in particular. The commodity analysts at the US investment bank, who until recently were still forecasting supply bottlenecks on the copper market and thus rising prices, had to backtrack sharply this week.

The former copper bulls drastically reduced their price target for the copper price. After last 8650 dollars per ton they now only expect a copper price of 6700 dollars per ton in the next three months.

According to the experts led by Nicholas Snowdon, the global energy shortages, which are heading towards an escalation in winter, would threaten global growth. With the worsening energy crisis in Europe, both consumer spending and industrial activity are likely to collapse significantly.

Gas bottlenecks in Europe as a risk factor

Colleagues at Bank of America, who were also formerly upbeat, had drastically cut their copper forecast last week. In their worst-case scenario with widespread gas bottlenecks in Europe, they are now expecting a copper price of $4,500 per ton. Compared to the current level, that would be another drop of almost 40 percent.

But not only the copper price is currently pointing towards recession. Support for this view also comes from the bond markets, as market expert Rethfeld emphasized to tagesschau.de: "Since the publication of the latest US inflation data, the yield curve has once again become significantly inverse."

Recession signals also from the bond market

Experts speak of an inverted yield curve when the yield on two-year US government bonds exceeds that on ten-year bonds. In the past, the bond market has proven to be a reliable early indicator of an economic downturn: According to a study by the Federal Reserve Bank of San Francisco, every economic downturn in the USA since 1955, with one exception, has been preceded by an inverted yield curve.

"A strong recession signal is coming from the bond markets," emphasizes Rethfeld. Developments in copper and bonds are very compatible and point in the same direction."

Copper low would be positive for the economy and stocks

In addition, from a technical perspective, the red metal still has downside potential. The technical analysts at HSBC Trinkaus & Burkhardt state that the copper price has failed on its old upward trend since 2001.

A resilient low in the copper price would not only be a positive signal for the global economy. "Then we would also see an end to the bear market in stocks," emphasizes market expert Rethfeld, referring to the financial crisis: At that time, the copper price had already marked its low in December 2008, and the stock markets followed three months later in March 2009.

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