The bear market was triggered by a key economic indicator. This has happened before any recessions in the past 30 years.
Copper just tipped into a bearish market. This has happened before every recession, which could suggest another economic downturn is underway.
It is used in all aspects of electrics, electronics and construction. This means that it is intertwined with the global economy. To trade at $8.255 per ton, the benchmark London Metal Exchange copper price has fallen 24% since its May 2021 peak of $10,700 a troy tonne. Technically, a bear market is defined as a decrease of 20% or more from its previous peak.
As the price of food, fuel, and housing continues to rise, recessionary fears are growing fast.
Copper has seen a 19% drop in its three-month period from March to June. This is the worst quarterly performance since the first quarter of 2020 when it was hit by the coronavirus crisis.
Jane Foley, the senior FX strategist at Rabobank, stated that these moves indicate that the market is more sensitive to recession risks.
Nomura, a Japanese investment bank that is a leader in Japan, predicted that the US would enter recession this year.
As the US fights inflation, the Fed raised the benchmark rate by 0.75 percentage points earlier this month. The Fed was responding to data from US Consumer Price Index which showed that inflation rose 8.6% through May, driven by an increase in energy prices.
Recently, Federal Reserve Chairman Jerome Powell has fueled the fires about the possibility of a recession. He said that although it was not the intended outcome, it is definitely possible. He also expressed his unconditional commitment to fighting inflation, but he refused to rule out a 100-basis point interest rate increase.
As investors abandon assets that could be lost in an environment of rising rates and inflation, stocks have fallen into bear market territory as has cryptocurrencies.
As the chart below illustrates, “Dr Copper”, a nickname that some associate with its ability to assess the health of an economy, is suggesting that those fears may become more real. It’s been in a bear market since the start of each of the four previous recessions, which began in 1990.
The dot-com bubble burst during the first weeks of 2001, leading to a recession that would continue for the rest of 2001. Copper had already reached its peak in September 2000, and it had lost approximately 20% by the time that the stock market crashed and economic growth slowed.
Foley from Rabobank said that the market is now concerned about slowing global growth due to fears around China’s output and headwinds to European growth.
Bank of America strategists stated that it was worthwhile to note how copper performed in the most aggressive rate-hike cycle of 1979/80 which also ended in recession.
“Copper didn’t fall while rates were rising but it eventually came under pressure when the economy contracted.” They stated that increased recession risk is important.
