When one of the most important procyclical assets breaks to fresh 52-week lows, it takes center stage. It also has major implications across a variety of markets.
But what about energy? What about grains and softs and the rest of the commodity space?
Well, most of those contracts have already been in correction mode.
And, based on the recent selloff in energy and other commodity-related stocks, a much deeper correction could be in store for these raw materials.
It’s definitely something we’re monitoring. And that’s where copper and today’s chart in focus come into play.
Let’s take a look.
Here’s an overlay chart of copper futures and the five-year breakeven inflation rate:
These two charts look almost identical. That's because copper and commodities, in general, are inflationary assets.
It’s no coincidence that commodities have been the best performing asset class off the pandemic lows as rates rose worldwide and inflationary pressures grew.
For the past year and a half, it’s basically been a tale of two tapes – commodities and everything else.
However, that’s starting to change, as these leaders are finally catching lower with the rest of the market.
The five-year breakeven rate making new lows is evidence that inflation expectations are cooling.
Seeing them turn lower and slip back into their prior multi-decade range doesn’t bode well for the global growth and reflation themes that have been in place these past few years.
At the same time, seeing copper roll over to fresh 52-week lows reflects further doubts about the rate of inflation and, more importantly, dwindling prospects for economic growth.
This is a double whammy for cyclical assets.
The fresh lows on these charts have broad implications for the entire commodity space as well as cyclical stocks. We’re already seeing it.
