Copper stocks have done nothing for several months. They seem ready to go up from here.
SPDR S&P Metals & Mining The exchange-traded fund (ticker: XME) has been essentially flat since early June, falling from $47 to now return to that level. That’s because the price of copper has also gone nowhere: it’s down 4% since the beginning of May.
Driving the weakness in the industrial metal has been concerns about generally weak economic growth and concerns that interest rate hikes coming from the Federal Reserve will further curtail expansion. This will hurt demand for the metal, often called Dr. Copper, as the price can give clues about the economy.
It should come as no surprise that the moves have been muted since June. The price had more than doubled from its low point in March 2020.
Now copper stocks can rise. The price of the ETF has risen to its current level of $47, but has failed to surpass it twice since June. This timing may be different as the price is now above its 50-day moving average of $43, indicating that investors are comfortable buying shares in the fund at prices above their recent levels.
“The fund is headed for a breakout on the heels of strong industrial metals performance,” said John Kolovos, chief technical strategist at Macro Risk Advisors. “The 10-month bullish consolidation will be complete if XME can build a price above $48.”
Simply put, a move above $48 confirms that the fund’s seven-month stagnation was just that, and not a harbinger of future losses.
Some key pointers will add up in terms of lasting gains. Firstly, the price of copper should move up from here. Metals and stock prices have moved in lockstep with each other since at least the end of the 2008-2009 financial crisis. Copper, at $4.57 a pound, is still below a multi-year high of $4.75, though it has risen 9% since its December selling low. This is a good start for stocks.
A further increase in bond yields would be another positive sign. Higher bond yields indicate that the market is expecting higher long-term inflation, partly due to higher demand in the economy. Copper will benefit from the construction of more buildings, electronics and machinery.
The 10-year Treasury yield, at 1.74%, is just below the pandemic-era intraday peak of 1.81%. Many on Wall Street see it rising further as expectations are for long-term inflation of more than 2% a year. Bond investors typically demand returns higher than the inflation rate. “Rates are trying to break even to 2%,” Kolovos said, referring to the yield on the 10-year Treasury loan. Copper is “all about interest rates.”
The big X-factor, of course, is how badly the Fed’s rate hike will affect the economy. But for the time being, copper stocks are likely to rise.
Write to Jacob Sonenshine at [email protected]