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Metal Miner

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Copper Rally Stalls As Market Awaits Chinese Demand Recovery

  • Copper prices started off the year with a bang.
  • The rally appears to be losing steam as the market awaits evidence of China’s demand rebound.
  • Global copper manufacturing has declined, which could help bolster prices as economic conditions are expected to improve in the coming months.

Via AG Metal Miner

 

Copper prices reacted to short-term resistance and rallied at the beginning of the year. That said, copper prices need to break lows and form a lower high to change the overall trend. Currently, the trend is up, and prices are expected to continue rising. Technical support levels should act as a price floor, giving buyers opportunities at price dips. 

Overall, the Copper Monthly Metals Index (MMI) rose 9.19% from January to February.

Rally for Copper Prices Stalls Amid Weak Global Manufacturing

Copper prices hit their highest point since June toward the end of January before the rally began to stabilize. Optimism over China’s return helped fuel the upside momentum, but sentiment appears to have shifted going into February. Markets now wish to wait and see for evidence of returned Chinese demand before pushing copper prices up another leg.

Meanwhile, global manufacturing health continued to deteriorate, which helped temper some of the bullish action. In the U.S., manufacturing dipped deeper into contractionary territory. According to the Institute for Supply Management, the Manufacturing PMI fell to 47.4 in January from 48.4 in December. This marks the third consecutive month of contraction and the lowest figure since May 2020. In China, the Caixin General Manufacturing PMI saw modest improvement, but nonetheless remained in contractionary territory for the sixth consecutive month. Ultimately, it rose from 49.0 in December to 49.2 in January. The downturns for both output and new orders appeared to moderate from the previous month. COVID continued to pressure both demand and operations. However, business optimism strengthened as companies expected economic conditions to improve in the coming months.  

January Jobs Gains Signal More Rate Hikes Ahead, Effecting Copper Prices

As markets expected, the Fed slowed its rate hikes on Feb. 1. This time the Fed approved a quarter-percentage-point increase to bring its benchmark interest rates to 4.5%-4.75%. However, just days later, stronger-than-expected jobs data caught markets by surprise.

Data released by the U.S. Labor Department on Feb. 3 showed employers added over half a million jobs in January. This saw the unemployment rate fall to its lowest level since 1969 – just 3.4%. The hiring jump even managed to catch Fed policymakers by surprise, with San Francisco Fed President Mary Daly branding it as “wow.” The data also seemed to defy ongoing reports of layoffs in certain sectors. However, as the Fed tries to cool inflation, the hot labor market will likely mean its quantitative tightening efforts are not quite over.

U.S. Dollar Index Finds a Bottom

Meanwhile, the U.S. dollar index (DXY) appears to have found a bottom, at least temporarily. This helped ease some of the upside pressure on copper prices. Indeed, the index fell just over 1% between January and February and now hovers slightly above the 100 mark.

Since late September, the U.S. dollar has experienced a strong downside correction. Meanwhile, markets responded to the hawkish Fed by pushing shares up to a 20-year high. The index has now fallen over 10% from its peak. Currently, it appears unlikely to see a rebound that will challenge that high in the foreseeable future. The shift downward, however, helped metal prices that trade inversely to it (such as copper) to break out to the upside.

The latest jobs data will also likely prevent any strong downside price action for the DXY. Ahead of the March hike, markets appeared optimistic the Fed might halt its rate hikes and pivot earlier than expected. Some speculated the Fed would increase rates for the final time in March, with a pivot possible as early as September. Fed Chair Jerome Powell stood in contrast to such hopes as he noted, “given our outlook, I just don’t see us cutting rates this year.” The ever-resilient labor market all but confirmed this. Indeed, many expect we could see the terminal rate of 5.1% that some Fed policymakers floated back in December rise even further.

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By Nichole Bastin

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