Looking to the Futures

April 10, 2020

 

Looking into the future with accurate vision can be a valuable skill for investment managers. Copper is the world’s third most widely used metal, ranking behind iron and aluminum and is used in highly cyclical industries such as construction and industrial machinery manufacturing. With copper’s reputation as a leading economic indicator, it can’t hurt to keep an eye on the red metal as we attempt to observe what’s ahead. 

 

As we started 2020 analysts seemed to agree that fundamentals for copper appeared positive. Prices were moving higher throughout last year’s fourth quarter as the progress in global trade relations put an encouraging bid to the market. In the absence of a major economic downturn, supply-side challenges were expected to help boost prices. 

 

In mid-January copper traders welcomed encouraging U.S. housing starts data that surged to a 13-year high as low interest rates and solid job growth ignited a flurry of new building. But the strong housing data coincided with unexpectedly weak data on U.S. capital goods orders and the emerging concerns of the Coronavirus originating out of Wuhan, China. As fears of a global pandemic took hold, copper futures embarked on an epic losing streak that reached 12 consecutive trading sessions in late January and notched the longest stretch of consecutive down days in 30 years of observable data.

 

More recently, turbulence overcame the copper market when the May 2020 futures contract dropped 15% in just three trading sessions during the week of March 16. Since then the market has been able to stabilize and move slightly higher. 

 

 

The copper-to-gold ratio, a risk gauge, has dropped to five year lows. Typically a low ratio indicates a market anticipating fear, while a high ratio would call for global growth. While the current ratio stands well above the readings from the financial crisis 12 years ago, the ratio is worth monitoring as we learn what to expect post-pandemic.

 

Supply 

 

The supply variable for copper remains a persistent challenge. While lower energy costs will provide a tailwind for miners, a significant number of mines are expected to experience prolonged shutdowns due to the pandemic. Additionally, growing focus on health, environmental, and social factors make mining more difficult, and labor relations in the mining industry remain a chronic sticking point. Analysts had seen 2020 bringing a supply deficit when compared to demand, but those estimates are now called into question. 

   

Demand 

 

While Asia in general accounts for 68% of global use, China specifically is the key demand growth variable to monitor. Their annual growth in copper demand was 5.7% in 2018, 1.2% last year, and was estimated to rebound to 2.6% this year before the health concerns took hold.

 

Characteristics of COMEX Copper Futures

 

COMEX, a division of the CME Group, has offered Copper Futures contracts since COMEX was incorporated in 1933, and in its current high-grade offering (COMEX HG) since 1988.

 

Copper traders typically watch cyclical industries, such as construction and industrial machinery manufacturing, as well as political situations in countries where copper mining is government-controlled. With electrical wiring and construction accounting for so much of its use, copper prices are sensitive to statistics involving economic growth, particularly reports such as housing starts. 

 

Margin requirements for May 2020 Copper Futures have moved up to $6,188, representing roughly 11% of the contract value. A few months ago, the margin requirements were around 5% of the notional value. The unprecedented volatility from the global drop in demand has forced margin requirements higher, even as the price has dropped. 

 

Options on Copper Futures contracts have gained popularity with increased volume in the last few years. Implied volatility for options is currently in the high 20’s for near-the-money options through the end of the year. For more information about Copper Futures, call Schwab Futures at 877-280-6040.

 

 

Technicals May Copper Futures HGK20

 

Some positive data was observed by Hightower research after an upside crossover of the 9 and 18 day moving averages as they watch for a move above resistance levels that could reinforce momentum studies which are moving higher. Trading Central futures research sees upside resistance at 2.277 and looks for choppy trade with a bearish bias. 

 

Resistance 2      2.3083

 

Resistance 1       2.2842

 

Pivot                    2.2633 

 

Support 1            2.2392

 

Support 2            2.2183

 

SMA 20 Day       2.22

 

SMA 50 Day       2.43

 

SMA 200 Day    2.62

 

RSI 14 Day          50

 

Contract Specifications

 

 

Trading Calendar

 

EIA Crude Oil / Gasoline Report                  04/15/2020 10:30 a.m. ET

 

Industrial Production                                      04/15/2020 8:15 a.m. ET 

 

EIA Natural Gas Report                                  04/16/2020 10:30 a.m. ET

 

Copper Futures Options Expiration             04/27/2020

 

First Notice May Copper Futures                  04/30/2020 

 

Important Disclosures
 

Schwab Center for Financial Research ("SCFR") is a division of Charles Schwab & Co., Inc. The information contained herein is obtained from third-party sources and believed to be reliable, but its accuracy or completeness is not guaranteed. This report is for informational purposes only and is not a solicitation, or a recommendation that any particular investor should purchase or sell any particular security. The investment information mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision. All expressions of opinions are subject to change without notice in reaction to shifting market conditions.

 

(0420-0XTX)

 

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