US PMI Miss, China Government Shakeup Bode Poorly for the Red Metal

Copper, US PMIs, Rate Hike Bets, China GDP, Lockdowns, Technical Outlook – Talking Points

• The red metal is on the move lower for the second day despite upbeat China GDP data
• A contraction in US manufacturing PMI data drags on the red metal’s demand outlook
• Copper prices trade within a Symmetrical Triangle, indicating possible near-term breakout

Copper prices are trading lower for the second day as traders weigh deteriorating economic conditions amid rising rates that are trickling down into the economy. The United States’ manufacturing sector fell into contraction in October, according to a purchasing managers’ index (PMI) from S&P Global. The headline manufacturing figure crossed the wires at 49.9, down from 52 in September. A reading below 50 indicates contraction, whereas a reading above 50 indicates expansion.

The red metal is used heavily in industry, explaining the downside price reaction on Monday that is carrying over into today’s Asia-Pacific session. More concerning, however, is a sub-component index that tracks new orders, which fell at “the sharpest since May 2020,” according to S&P’s news release. A drop in new orders generally precedes broader declines, as it often acts as a proxy demand for manufacturing firms.

Another discouraging development for copper markets is that Chinese President Xi Jinping secured a third 5-year term in office. Perhaps even more bearish for the metal is Li Qiang’s ascension. He is now on track to serve as the country’s next premier. Li Qiang implemented the two-month lockdown in Shanghai, which was seen by many as a heavy-handed crackdown and likely the strictest of the pandemic.

His promotion signals political appetite for more lockdowns and discourages optimism that China will back off of its “Covid-Zero” strategy. This is a big negative for copper as China is the largest metal consumer globally. That, along with incoming rate hikes from the European Central Bank (ECB) and the Bank of Canada (BoC), bode poorly for the industrial metal even amid low inventory levels.

Copper Technical Outlook

Copper prices have coiled over the last several months, forming a Symmetrical Triangle pattern. A breakout may occur once prices pierce above or below the triangle’s trendlines. The measured move—based on the triangle’s widest point—sees a potential breakout to around the 4.15 or 2.67 levels. That said, traders should position their trades for a near-term vol increase.

Copper Daily Chart

Chart created with TradingView

— Written by Thomas Westwater, Analyst for DailyFX.com

To contact Thomas, use the comments section below or @FxWestwater on Twitter