Recession Fears Trigger Tumble in Industrial Metals

The decline in industrial metal prices, particularly copper, suggests an increasing risk of a US recession and a challenging outlook for equity markets.

The recent decline in industrial metal prices, particularly copper, should ignite concerns among investors, casting doubts on the long-awaited soft landing in markets. The chart below shows that, the Bloomberg Industrial Metals Index has experienced a significant downturn, plummeting by over 20% since late January, with an alarming 14% drop recorded in the past month alone. Such a rapid descent in metal prices evokes memories of economic patterns that have historically preceded recessions.

Not the best recession forecaster

A closer look at past instances reveals that declines in industrial metal prices often precede economic downturns. In the six months leading up to the 2001 recession, industrial metal prices witnessed an 11% decline. Similarly, during the Great Financial Crisis, and the recession that came with it starting in December 2008, these prices experienced a staggering 60% collapse between February and December of the same year.

However, as the chart above reveals, it is crucial to note that significant price declines in industrial metals do not always indicate recessions, as factors like supply shortages and surpluses can significantly influence these fluctuations. Hence, relying solely on commodity prices for recession forecasts is not the most reliable approach. This is why we have created our US Recession Scoreboard.

In contrast to oil, industrial metals lack the protective measures of a quasi-cartel like OPEC, leaving them vulnerable to economic and market forces. A recent statement by Saudi Energy Minister Prince Abdulaziz bin Salman hinted at the alliance’s readiness to confront speculators, warning them to exercise caution. This development caused crude oil prices to rise by approximately 3%.

Copper collapse

Copper, a vital industrial metal with projected increased demand due to sustainability initiatives and the rise of electric vehicles, too, has witnessed a substantial decline. Since late February, copper prices have tumbled by 16%, and in the past month alone, they have dropped by 13%.

Furthermore, the price of copper has reached its largest discount against its futures equivalent in almost two decades, suggesting a sudden weakening in global demand, especially as China’s economic rebound shows signs of stalling.

The decline in copper and industrial metal prices has significant implications for US Recession Scoreboard and implied recession odds estimates. The continuous downward trend in commodity prices, now down 26% from their peak, has led to our implied recession odds estimates standing at 68%. Following the US yield curve, commodities currently indicate the highest likelihood of a US recession. Interestingly, this starkly contrasts corporate and high-yield bond spreads, which reflect an (almost) negligible chance of a US recession.

We have updated our US Recession Scoreboard, shown above, with the recent decline in copper prices, mirroring a somewhat elevated, yet increasing, chance of a US recession. Most indicators within our Recession Scoreboard are also signaling elevated odds of an impending recession. As we move forward, we anticipate further deterioration in macroeconomic momentum, resulting in negative economic surprises that will exert additional pressure on equity markets.

While a resolution to the US debt ceiling issue may provide temporary relief, we do not believe it would be sufficient to reignite the market rally. However, given the AI boom, with NVIDIA as another notable example, we remain cautious not to adopt a more bearish stance at this point.

Conclusion

In conclusion, the notable decline in industrial metal prices, particularly copper, warrants attention from investors as it indicates an increasing probability of a US recession and reflects a deteriorating macroeconomic outlook. With predominantly negative economic surprises expected in the coming months, equity markets may face further challenges. We remain underweight Developed, and Emerging Market Equities.