Copper and FTSE Spread Betting Markets Display Bearish Signals
Over the past 18 months it has been striking how well the copper and equity markets have moved in lock step with each other.
Copper has always been closely scrutinised as a bellwether of economic activity and never more so than with respect to China’s consumption of it. Any concern or fear that Chinese copper consumption could start to fall back has had the effect of dragging risk off equity markets and pulling them lower.
The recent steps by the Chinese administration to relax the Yuan peg were a sop to the US administration, ahead of this weekends G20 meeting. The US, along with other governments, have argued that the current value of the Yuan gives the Chinese an unfair advantage, as it keeps their currency artificially low, and makes their exports cheaper.
A further drag has been the recent implementation of austerity measures throughout Europe which has given rise to fears about the drag these measures would have on global growth.
Certainly the UK budget this week has raised investor awareness of the problem. With Germany and France shunning calls from Messrs Obama and Geithner to ramp up stimulus measures, investor concerns about growth aren’t likely to diminish in the short term.
In any case as risk appetite diminishes, equity markets fall back and so does copper. As risk appetite increases so copper rises. This has been especially true in the last 12 months as can be seen from the chart below.
The close correlation between these two markets is quite striking, but not altogether surprising given how heavy in resource, and particularly mining stocks, the FTSE 100 is.
If we look at the two charts independently we can also see significant similarities as well with respect to the formation of certain chart patterns, as well as a bearish moving average crossover.
The FTSE 100 is in the process of posting a “death cross” which is where the 50 day crosses below the 200 day moving average. Furthermore earlier this week the 200 day average successfully re-buffed an attempt by the FTSE to break above it.
There is trend line support through 5,100 from the recent lows around 4,800, and a break of this level could well increase the bearish pressure building up on the downside.
If we also look at the copper chart over the same period we can see there is a sharp similarity between the two charts, with the same “Death Cross” forming and the same short term support line.
As with the FTSE 100, the 50 day and the 200 day moving averages are also close to crossing over and if the lower highs and lower lows continue to weigh down on sentiment we could well see further declines in equity markets.
The price action over the next few days is likely to be quite important in this respect, and probably not a little choppy, but long term momentum is starting to turn negative.
At best we could well have quite a long term period of sideways consolidation, if we don’t get falls in commodity prices and equity markets, which these indicators are suggesting we might.
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'Copper and FTSE Spread Betting Markets Display Bearish Signals', Feature by D. Jones, last update: 28-Jun-10
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