Copper Continuous Contract (HG.F) & Crude Oil Continuous Contract (CL.F) vs. Energy Equity ETF's

The February equity market correction has continued through to the end of the month and into March. A surprise increase in the Fed’s favorite inflation measure added to speculation that the US central bank may have to remain more hawkish on interest rates and monetary policy than investors had hoped earlier this year.

Meanwhile, the last phase of earnings season has been a bumpy one with Canadian banks reporting mixed results and some increases to loan loss provisions, and US retailers generally missing on sales and posting soft guidance. With earnings season now over, the corporate calendar for the coming week is pretty empty, which could lead investors to focus more on economic and monetary news through to the Fed meeting later this month.

With North American employment numbers not coming out until Friday the 10th, the economic calendar for the coming week is headlined by the Bank of Canada and the Reserve Bank of Australia. With Australia still playing catch-up, the Bank of Canada’s decision could be a particularly significant one for the Canadian Dollar and potentially the relative performance of Canadian Equities relative to their US counterparts moving forward. After raising interest rates at their last meeting, Governor Macklem and his team hinted that they may be prepared to pause raising interest rates. Since then, US FOMC members, have remained hawkish on interest rates. If Canada does officially pause its tightening program, this could potentially have a negative impact on the Canadian Dollar in the near term.

In the wake of recent economic numbers indicating high inflation and a weakening economy, particularly in the US, talk of 1970s style Stagflation and stagnation has become more prevalent lately. In this week’s issue of Equity Leaders Weekly, we take a look at what copper is telling us about the global economy and at the relationship between crude oil and energy stocks.

With its wide variety of applications in industrial and consumer products, investors have historically viewed copper as a proxy for the global economy and resource demand, with a particular sensitivity to economic conditions in China.

After selling off last summer as China went back into lockdown, copper (HG.F) bottomed out in July and spent three months base building between $3.25/lb and $3.75/lb. As China took steps to end its zero-COVID policy and reopen its economy, copper started to recover, staging a series of bullish pattern and triangle breakouts and even snapping a downtrend line.

Since the beginning of February, however, copper’s rally has run out of gas and the metal price has started to roll over. The completion of a bearish Double Bottom pattern signaled that a correction has commenced and although the price has bounced back into an X column, it would still need to break a downtrend line near through $4.19/lb to signal an upturn with next potential resistance near $42.7 ad then $4.40. Initial support appears in the $3.95 to $4.00 area near recent lows and a round number, then closer to $3.72.

Factors which may be dragging on copper include: China’s resource demand rebounding more slowly than had been hoped, the North American economy starting to struggle, and headwinds form the recent US Dollar rally on commodities priced in USD.

For the last several months, we have been tracking a wide divergence that had opened up between the price of Crude Oil, and the stocks of energy producers. This time around, we also looked to the relative performance of energy service companies and alternative energy companies for context and insights.

Since the performance gap between the Crude Oil Continuous Contract (CL.F) and the iShares US Oil & Gas Exploration & Production ETF (IEO) opened last summer, there has been a debate over whether the stocks would pull the commodity price up or if the commodity price would drag energy stocks down. After holding up through to the end of the year, IEO appears to have turned downward over the last month, while CL.F has stabilized.

Meanwhile, energy service stocks, represented by the iShares US Oil Equipment & Service ETF (IEZ), have started to outperform energy producers on a relative basis, rallying last fall and into the start of this year and consolidating their gains recently. That being said, service stocks have underperformed for most of the last two years and seem to still be trying to play catch-up.

Alternative energy stocks, represented here by the Invesco Solar ETF (TAN) have been in the news quite a bit lately with several companies reporting results recently, many of which disappointed and led to high profile flameouts in the market. Interestingly, despite government support and media attention, the sector has struggled relative to traditional energy companies. TAN is actually down more than 10% since the beginning of 2021, and has essentially been drifting listlessly sideways for the last year.