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Digital Subscriptions > The Hedge Fund Journal > Issue 111 - February 2016 > Copper Spot Prices and Stock Market Volatility

Copper Spot Prices and Stock Market Volatility

Technical analysis suggests prices lead S&P 500

Have you ever wondered if you could reduce your exposure to risk before it is too late? For decades individuals and scholars have been stumped trying to determine a key indicator for predicting stock market volatility. In this study the daily closing prices for the copper spot market were used to see if it has historically led the S&P 500. By using technical analysis techniques on a 5, 10, and 15-year chart of the copper spot market and the S&P 500 solid conclusions were able to come to light. 66% of the time over the past 15 years the spot market for copper has led the S&P 500. Key trends were also identified to foretell that the S&P 500 might experience a market correction in the near future, while also giving us a price floor for copper prices. These are strong indicators which, if followed, could allow an organisation to improve its bottom line and/or give it the potential to make a profit from future market fluctuations.

Introduction

Stock market volatility has long been an issue to which companies have aimed to reduce their exposure. Unfortunately today’s financial markets are heavily integrated and it is difficult to avoid the dramatic effects of a market downturn no matter where your investments lie. The current global economic environment for large commodity-driven organisations is almost in a state of financial crisis. For decades gold has been idolised as the ultimate flight to safety instrument to hedge against market volatility. Gold historically has been popular due to it being a tangible asset that was once the cornerstone of various countries’ currencies. In the week of 8 November 2015 there were two Wall Street Journal articles highlighting the global rout in copper markets and how this could spell disaster for companies like Glencore. Glencore is currently ranked number 10 on Fortune’s 500 list of the largest companies in the world. These articles sparked a question: could this hardship that Glencore is now enduring been avoided or at the very least mitigated? Copper prices, which are denominated in US dollars, have been shaken to the core. The reasons for this stem from global supply outpacing demand, the US dollar continuing to appreciate against various currencies, and a dismal global economic outlook. These main factors have many countries and companies readjusting their future growth estimates.

Copper is the most actively traded base metal and is a key material in various industrial applications, from “electronics, electrical products, construction and infrastructure” (Erheriene; see references). Copper was chosen as the independent variable due to it being highly integrated with global industry. The goal of this study is to identify if there is a relationship between copper prices and stock market volatility. My research question is “do copper spot prices lead the S&P 500?” In 2010, according to the China Iron and Steel Association (CISA), “China, which is currently the world’s largest consumer of copper, accounted for half of the world’s total copper consumption in 2010.” China has reduced its economic growth forecasts for the coming years. The Wall Street Journal mentioned that copper is “reeling from a trifecta of weaker demand, growing supply and a rocketing dollar” (Erheriene). At current prices “15% to 20% global production capacity is loss making” (Erheriene). Companies like Glencore would benefit from this study because it would offer support and foresight into future market fluctuations so they can properly adjust asset allocations and utilise hedging techniques to protect their bottom line.

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INFORMING THE HEDGE FUND COMMUNITY With access to some of the industry’s biggest names and an astute and talented group of writers and contributors, The Hedge Fund Journal has established itself as a trusted source of information on the hedge fund industry.
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