In terms of leading indicators, for a long time copper has been regarded as one of the more reliable.
According to Investopedia, Dr Copper is the market lingo for the base metal that is "reputed to have a PhD in economics because of its ability to predict turning points in the global economy". Because of copper's widespread applications in most sectors of the economy – from homes and factories, to electronics and power generation and transmission – demand for copper is often viewed as a reliable leading indicator of economic health. the website days. "This demand is reflected in the market price of copper. Generally, rising copper prices suggest strong copper demand and hence a growing global economy, while declining copper prices may indicate sluggish demand and an imminent economic slowdown."
As you can see in the chart above, copper prices were in a pretty strong downtrend for the bulk of last year until it formed a low around November-December. Of late, copper prices have really got a wriggle on as the triple-whammy of QE3, ECB stimulus and $US157 billion of Chinese infrastructure spending boosted the already supply-constrained metal. This has seen a break-out from the yearlong downtrend and could be a positive sign for continued strength in equity markets.
As we spoke about last week (Scaling the wall of worry, September 29), expectations are set for the world to fall over in the coming months given the growing threats of the fiscal cliff, euro debt crisis, US election, etc. Yet, equity markets globally have shown huge strength recently, with US markets not far off four-year highs. If the world really was about to fall over again, surely equity markets would be reflecting it? Remember, equities tend to be a leading indicator, too.
Only time will tell whether Dr Copper once again proves his hand in the leading indicator game. For now, here are some of Australia’s major copper stocks with a market cap of more than a billion dollars: BHP Billiton; Rio Tinto; OZ Minerals; PanAust Limited; Sandfire Resources; CuDeco; and Independence Group. The below chart shows two of the better performers versus the benchmark S&P/ASX 200 index in Sandfire Resources (SFR) and CuDeco (CDU).