Saturday, August 22, 2009

Industrial Metals: Asset Class Review

In recent posts we have taken a broad look at U.S. Treasuries and a similar look at gold, oil, and the U.S. dollar. These big picture views help us appreciate intermarket relationships that capture growth/risk assumption vs. recession/risk aversion themes among global macro traders and investors.

In this post, we look at industrial metals: copper and aluminum. These metals are important to follow, because they are sensitive to economic activity. If investors believe that emerging economies are rebounding, they will expect increased industrial activity, which will show up as demand for these raw materials. Conversely, a return to economic weakness would slow industrial activity and weaken demand for these commodities.

What we see is that the industrial commodities took sizable plunges during the late 2008/early 2009 debacle, dropping more than 50%. Copper bottomed ahead of aluminum (and ahead of the stock market bottom in March) and has rebounded better than aluminum. Both remain well below their 2008 peaks, but also well off their lows, as they have benefited from strength in the emerging markets.

With the recent relative weakness of emerging market equities, we've also seen a stalling out of aluminum and copper near their recent highs. Both, however, continue to look relatively robust, well above their June and early July pullbacks. Along with oil, these commodities should give us a good indication if investors are anticipating any double dip to the recession; so far, that's not the message from the charts.