copper stacks

Copper Sinks as Chinese Market Tanks Market Sentiment

By:Thomas Westwater

Copper prices fall as China’s property sector sparks risk-off move

  • Copper futures drop on China economic woes.
  • The property sector remains a headwind for Beijing.
  • Copper inventory is building globally.

Copper futures are trading lower during Monday trade as traders assess mounting economic headwinds in China and elsewhere that are denting the metal’s demand outlook. The December contract (/HGZ3) is down over half a percent to trade at $3.6706 per pound, which puts the metal on track for the lowest close since May.

China and its ongoing property sector woes are the main factors dampening the price of the red metal. Overnight, Chinese property stocks plummeted, with one listing—China Aoyuan Group Ltd. (47C.MU)—falling 72.46%. Investors were spooked after Chinese real estate developer Evergrande (3333.HK) failed to qualify for new debt under its restructuring plan.

Evergrande’s failure to qualify for new notes sparked a new risk-off wave through markets at a time when sentiment around China’s economy was just starting to recover following economic data that showed slowing growth in the country.

Increasing inventory and higher rates may hold copper back

Copper is sensitive to China because it is the largest consumer, and China’s property sector drives much of that appetite. However, investors are also concerned with central bank policy elsewhere, specifically the U.S. Federal Reserve.

Last week, the Federal Open Market Committee (FOMC) kept interest rates unchanged, but its policy statement and Chair Jerome Powell’s press conference signaled that interest rates are likely to stay higher for longer. The impact on bond prices is sending yields higher.

That longer-for-longer narrative is causing the market to recalibrate to the consequences of higher rates, which means slower economic growth. That's bad for copper since it is primarily used in industry and not as a store of value, like gold or silver.

While many forecast the copper market to be in deficit next year and through 2025, the current growth slowdown is driving inventory levels higher. Higher supply is bad news for copper bulls. At the London Metal Exchange (LME), copper stocks are now at the highest level since May last year after doubling over the past several months.

Copper technical outlook

Prices are breaking below the 78.6% Fibonacci retracement from the May to August move. A daily close below the key fib level may induce further selling pressure and push prices toward the May low of 3.5450. For now, the bearish momentum looks set to continue, with the MACD widening to the downside.

copper prices

Thomas Westwater, a tastylive financial writer and analyst, has eight years of markets and trading experience. @fxwestwater

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