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Trade War Continues to Capture Copper’s Attention

Trade War Continues to Capture Copper’s Attention

Copper prices slid in early trading on Tuesday morning. If this trend holds out through the day, this will mark the second session in a row the red metal saw negative numbers – this after showing an increase of more than half a percent Friday, somewhat stopping the bleeding to curb copper’s weekly loss to 1.26%.

The main reason behind the continued slump by copper: the escalating trade war between the U.S. and China. On Friday China unveiled tariffs on 5,207 items imported from the United States, with the extra levies ranging from 5 percent to 25 percent, which analysts say could eventually undermine growth.

Copper ore and concentrates are on the list of items earmarked for the 25 percent tariff. Although, the quantities involved are not significant for China, analysts at ING said in a note. “In 2017 the U.S. exported almost 433,000 tons of copper concentrate to China, which is only around 3 percent of total imports,” the note read.

Copper opened this morning at $2.75 a pound.

Benchmark copper on the London Metal Exchange opened this morning at $6,075 a ton, which is down 2.1 percent. That pushes the drop to more than 15 percent since hitting a 4-1/2-year high of $7,348 in June. Remember, most analysts judge the pulse of copper based off two numbers – $3 a pound, or $7,000 per ton.

Demand Remains Healthy

Despite all of the doom and gloom and the significant drop off in price, experts claim demand for copper remains healthy. “Grid spending has normalized,” analysts at Bank of America Merrill Lynch said in a note. “Higher outlays from utilities are particularly supportive this time around because the investment focus has shifted from aluminum-intensive power transmission to copper-intensive distribution networks.”

Another sign of healthy demand is the falling inventories in China, which at 192,817 tons in warehouses monitored by the Shanghai Futures Exchange are down nearly 40 percent since early April. Copper stocks in LME warehouses are at 250,625 tons and have fallen more than 35 percent since late March.

A Stronger Dollar

The price of copper remains vulnerable to a stronger dollar this week as expectations for additional U.S. interest rate hikes this year support demand for the greenback. A rising U.S. currency makes dollar-denominated commodities, including copper, more expensive for non-U.S. firms, which potentially would subdue demand.

Frequent tED contributor Andrew Hecht takes a deeper dive into the dollar in this Seeking Alpha article.

There aren’t many major events coming up on the economic calendar (see below), but Friday will see an update on consumer prices for July, which will be the week’s most closely watched U.S. data release.

The Fed kept interest rates on hold last Wednesday but said the U.S. economy was strong, indicating that it is on track to deliver expected rate hikes in September and December.

Expectations for higher rates tend to be bearish for copper, which struggles to compete with yield-bearing assets when rates rise, while a stronger U.S. currency makes copper and other dollar-denominated commodities more expensive for foreign investors.

Labor Watch

Copper gained some support to start the week thanks to the union at the Escondida mine in Chile, the world’s biggest copper mine. This comes after BHP formally requested a period of government mediation with the union, prompting the union to postpone the start of a strike approved by workers. Workers have reportedly told BHP they should prove its willingness to negotiate by Monday morning if it wants to agree to a deal with workers ahead of a pending strike.

Looking Ahead

Investing.com has compiled a list of significant events likely to affect the markets. While the calendar looks light, all eyes will be on China’s latest trade figures announcement tomorrow and, as mentioned above, Friday’s report on consumer price inflation here in the states.

Monday, August 6

Financial markets in Canada were closed for a holiday.

Tuesday, August 7

The Reserve Bank of Australia is to announce its benchmark interest rate and publish its rate statement, which outlines economic conditions and the factors affecting the monetary policy decision.

Wednesday, August 8

New Zealand is to release data on inflation expectations.

China is to publish its latest trade figures.

Thursday, August 9

The Reserve Bank New Zealand is to announce its benchmark interest rate and publish its rate statement. The bank will also hold a press conference to discuss the policy decision.

China is to publish data on inflation.

Canada is to release industry data on new house price inflation.

The U.S. is to produce reports on producer price inflation and the weekly report on jobless claims.

Friday, August 10

Japan is to release preliminary data on second quarter growth

The UK is to publish preliminary data on monthly GDP growth, as well as reports on manufacturing production, business investment and trade.

Canada is to produce its jobs report for July.

The U.S. is to round up the week with a report on consumer price inflation.

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Jim Williams

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