Crude Oil and Copper Talking Points:
- Coronavirus fears prompt a risk-off atmosphere through global markets
- The selloff in crude oil and copper in response to Coronavirus developments likely underpin the reintroduction of global growth fears
- The outlook for copper and crude oil hinge on global growth prospects, specifically the manufacturing and construction sectors
Commodities and Global Growth
Crude Oil and Copper are seeing a rough start to the year, with the commodities down over 16 and 9 percent respectively from January 1st. The novel coronavirus outbreak has brought global growth slowdown worries back into the spotlight and has weighed negatively on the price of crude oil and copper.
The virus first appeared in Wuhan, China on December 31st and has since spread abroad into other countries – including the United States. The international health scare and its potential impact on global GDP growth has been felt across equity, commodity and bond markets over recent weeks, but the sharp slide lower in crude oil and copper is alarming.
Check out our interactive Global Commodities dashboard for insight on worldwide commodity imports and exports over the last decade.
Chart created by @FxWestwater with TradingView
Copper and crude oil have been particularly susceptible to the panic surrounding the virus and is believed to reflect the recent injection of worries around the slowdown in global growth. The JPM global manufacturing PMI index declined through 2018 and slipped into contraction territory for six consecutive months beginning in May of 2019.
Source: Bloomberg
The slowdown in manufacturing activity is attributed primarily to the trade war between the United States and China. As global manufacturing declined, several organizations downgraded global growth forecast with the OECD cutting global growth for 2019 to 2.9 percent, the lowest since the 2008 financial crisis. Most recently, the IMF downgraded global growth forecast for 2020 from 3.4 percent to 3.3 percent.
Copper was the first to reflect the downturn in manufacturing with a decline of more than 20 percent from December 2017 to January 2019. Following closely, crude oil oversupply issues due to lack of demand added downward pressure on petroleum prices through 2018.
Despite this, investor sentiment remained broadly intact, though treasury yields along with equity markets began to decline at the end of 2018 due to distress stemming from the ongoing US-China trade war. Equity markets recovered and went on to make new highs in 2019, however, as the Federal Reserve shifted into a dovish stance alongside several other central banks slashing interest rates and has pressured sovereign yields lower.
Chart created by @FxWestwater with TradingView
Copper and Oil Outlook:
While both crude oil and copper have unique fundamental factors that can steer price action, the broader macroeconomic narrative will likely remain the key driver for the direction of these two commodities.
GDP growth in China will be paramount to the outlook across the short-term and long-term. The coronavirus outbreak is already expected to notably stunt Chinese economic activity in 1Q-2020 and could have an even more profound impact if the coronavirus epidemic worsens.
Source: Bloomberg
While the United States remains the largest economy in the world, China is the largest export-based economy and correspondingly affects a large portion of global manufacturing. As the Chinese economy continues to grow, expect to see an ever-growing correlation between Chinese markets, economic activity and commodity prices.
Chart created by @FxWestwater with TradingView
Given the growing divergence between the US and Chinese markets with commodities, it may be prudent to put a heavier weight on Chinese economic activity in forecasting commodity prices. As such, manufacturing PMI and construction activity could act as important indicators for the direction of oil and copper.
Source: Bloomberg
On the currency front, a weakening yuan will provide tailwinds to Chinese manufacturing activity by making it cheaper for China to import copper and oil. If global economic conditions lift, a weak yuan will likely add to appreciating prices across oil and crude oil.
Although, the PBoC – China’s central bank – may risk facing additional tariffs from President Trump and labeled a currency manipulator if the Chinese Yuan depreciates much further relative to the US Dollar.
Chart created by @FxWestwater with TradingView
In comparison, US market correlation between equity prices and commodities appears to be weakening as the S&P 500 has become increasingly resistant to downturns in oil and copper, which could be partly explained by the Fed’s ballooning balance sheet.
Chart created by @FxWestwater with TradingView
Turning to a technical picture, copper is up against an area of support set through previous periods ranging back to 2015. A break under this zone would leave little technical cushion to soften a slide lower until 2016 lows around the 1.9459 price. A drop near this area could see copper depreciate over 20 percent from current levels.
Chart created by @FxWestwater with TradingView
Following copper’s technical setup on a weekly timeframe, crude oil is trading within a range of consolidation set through previous years. Although, in contrast to copper, oil is currently resting against more recent support, which could help stem further downside should coronavirus fears persists.
--Written by Thomas Westwater, Intern Analyst for DailyFX.com
Contact and follow Thomas on Twitter @FxWestwater
