Copper joins oil in hospital

The decline in base metal prices shows doubts are emerging about the prospect of the lower oil price supporting a resurgence of economic growth.

Copper has joined crude oil in hospital, falling almost 6 per cent last night to a new six-year low.

It’s often called “Dr Copper” because of the way the widely used metal tends to ‘diagnose’ the economy. Barclays Bank said in a report last night: “copper is starting to take on the characteristics of oil, with a four standard deviation move overnight.”

The immediate cause of last night’s drop was aggressive selling by Chinese commodity investors, but Dr Copper’s downtrend is well established and has been accelerating for a while.

It’s down 12 per cent this year so far and, like oil, has now fallen almost 50 per cent, except it’s over a longer period – four years rather than the seven-month collapse in the oil price.

The fact that copper, and base metals more generally, have joined in the commodity rout in the past few days reflects the emergence of doubts that the fall in the oil price will support a resurgence of economic growth.

Shares on Wall Street fell this morning for the fourth day in a row, the Dow Jones by more than 1 per cent.

The London market fell by more than 2 per cent and other European markets by almost as much, even though the European Court of Justice paved the way for more aggressive policy action by the European Central Bank.

The immediate cause of last night’s action on both share and commodity markets was yesterday’s lowering by the World Bank of its forecasts for global growth to 3 per cent in 2015 and 3.3 per cent next year. In June it was forecasting 3.4 and 3.5 per cent.

Its chief economist, Kaushik Basu, said: “the world economy is running on a single engine. It is only the US economy that is forging ahead.”

The fact that the World Bank is simply catching up with market forecasters (it publishes its outlook every six months) was ignored by traders; they are only seeing negatives at the moment, and this morning another one emerged, with US retail sales falling by 0.9 per cent in December – much worse than expected.

Maybe lower gasoline prices are not going to boost consumption after all – at least, that’s the concern.

A big part of December’s fall in retail sales was a direct result of lower gasoline prices: spending at gas stations fell 6.5 per cent from November, purely because of lower prices.

The problem, according to analysts, is that consumers didn’t turn around and spend that saving somewhere else. Remove gasoline from the numbers, and retail sales still fell 0.4 per cent from November.

Meanwhile the European Court of Justice’s ruling on the new stimulus program that the ECB is considering – called Outright Monetary Transactions – was not the final word on the subject and contained a few caveats, which is why European markets were not particularly buoyed by the ruling last night.

But it still looks like quantitative easing – which is different to OMT – will go ahead soon. After months of talking about it, and politicking with the Germans, ECB chief Mario Draghi is expected to announce QE at either the next meeting, or the one after.

But so far at least, 2015 is living up to forecasts of market volatility.