Copper, a barometer for the global economy, broke a key support level, signaling more selling ahead for the metal and possibly stocks and other risk assets.
"Today copper has been weak because the IMF came out with lower expectations of the euro zone economy and the IMF is saying we don't see great physical demand at this time," said George Gero, an analyst with RBC.
Copper fell more than 3.5 percent and closed at $3.1875, its first close below the key support level of $3.20 since October 2011. Copper has moved down in the commodities shakeout that knocked more than 2 percent off the price of oil Wednesday. Gold attempted to stabilize at a higher level, but it was also lower on the day.
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The IMF's downgrade of global growth projections for this year and next was the latest negative for the metal, which has been weakened by the downward spiral in gold and other commodities. Weaker-than-expected GDP from China earlier this week and a revision by Moody's on the outlook for China to stable from positive was also a negative, since the country accounts for about 40 percent of global copper consumption. A decline in European auto sales was also a factor.
"When I look at copper, it reminds me a lot of gold before that big breakdown," said Richard Ross, global technical analyst at Auerbach Grayson. "When we look at levels like $3.20 in copper, that's the low level of the trading range that has held since the summer and fall of 2011. We tested that level in 2012, but really this is the first significant break in two years.This would be akin to and displays some technical symmetry to gold below $1,540. … As we saw when you broke below that level, it opened the floodgates to an extremely fast move down. I think copper is setting itself up for precisely that type of move."
Traders saw another move as a warning earlier this month, when the 50-day moving average crossed the 200-day—another negative sell signal.
"The world economy looks like it's slowing down," said Art Cashin, UBS director of floor operations. "You can talk all about the whipsaw of gold, but all these commodities are telling us that China and the rest of the world is slowing down. You want to be cautious about it" when it comes to the stock market, he said.
Stocks have been choppy since commodities began their downward spiral. The S&P 500 was off 1.5 percent Wednesday, after sharp swings Monday and Tuesday.
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The VIX, the market's fear meter, also jumped sharply Wednesday, and it is sometimes viewed as a caution about stock market declines.
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"Given the momentum that we're seeing, I would think a test of $3 is imminent, and any break below $3 would have to be extremely bearish—not just for copper but more importantly as a macro proxy for the emerging markets, the global growth story, commodities as an asset class and China," Ross said.
But copper doesn't have a huge retail presence the way gold does, so the metal's downward turn has not been sudden.
"I think most of the business in copper has been the professional business," Gero said. "They were hedging all day, and while they were selling they bought back at the end of the day [Tuesday]. The only thing they were doing was hedging against all the other metals selling off."
"Meanwhile, the dealers are hedging, and the miners who have not hedged are getting hurt because they haven't hedged," Gero said, adding that sentiment in copper has soured quickly from just a few weeks ago.
"Everybody thought the rebuilding from the storms, the tsunamis and Chinese demand was really going to take out a lot of copper. A month ago, we had better car sales, good for copper, better home sales, good for copper. So for a while, people thought copper was going to do better," he said. (Track Commodities Here)