You'd have to have just woken up from a Rip Van Winkle-style slumber to be unaware of what equity markets have been up to since Donald Trump was elected President of the United States.
In short, equity indexes in the US are at or near all-time highs, the VIX has been trading at depressed levels for an extended period of time, and sell-offs in equity prices have all but dried up since November 2016.
Meanwhile, in terms of the new President's policy agenda, there are several slated items that could have a big effect on financial markets. The front-line initiatives include a corporate tax cut, a nationwide infrastructure upgrade, and a possible border adjustment tax.
While the potential impact of these policies is extremely complex across the various scenarios that could actually materialize, a recent episode of Closing the Gap: Futures Edition took a closer look at one commodity caught up in the current economic and political cross-winds: copper.
Looking at the price history of copper (which is quoted by the pound), the commodity was trading almost $4 prior to the financial crisis, and dropped steeply to around $1.50 during the panic. Copper prices rebounded as high as $4.50 in 2011, but have gradually declined to around $2.70 over the last five years.
The major applications of copper are electrical wiring and other industrial/machinery uses, so periods of economic growth generally tend to be associated with rising copper prices. As with any commodity, copper prices are also heavily influenced by demand from China, which has been lagging for the last year or so.
As noted on Closing the Gap, major turns in copper prices have often coincided with turns in broader equity prices. Given the roughly 12% bounce in U.S. and global equities since the election, it's possible that the more muted rise in copper prices over the last few months may only be the start of a more pronounced rally.
Recent economic data from China has suggested that commodity imports are on the rise, which in combination with a successfully implemented infrastructure initiative in the United States could certainly have a positive impact on global copper prices.
On this episode of Closing the Gap, a couple trade ideas are introduced and outlined that could theoretically take advantage of another leg up in copper prices. The primary trade described on the show involves a pairs trade between copper and the S&P 500.
The pairs trade involves one long copper leg (/HG), in tandem with a short S&P 500 leg (/ES). This trade does well obviously if copper rises to a greater relative degree than the S&P 500. For traders seeking a theta trade, another pairs trading involving options in these two underlyings is also discussed.
While these trade structures may not fit your current approach and/or risk profile, it's possible that conditions may develop that make a pairs trade such as this a lot more attractive. One such development could be the successful passage of an infrastructure bill in the US.
For more details on these sample trades, we hope you’ll review the full episode of Closing the Gap: Futures Edition when your schedule allows.
In the meantime, following the price of copper (and other infrastructure-relevant commodities) going forward may also be a method of finding new opportunities in your portfolio.
If you have any questions about copper, or any other trading-related topic, we hope you'll reach out firstname.lastname@example.org at your convenience.
Thanks for reading!
Sage Anderson has an extensive background trading equity derivatives and managing volatility-based portfolios. He has traded hundreds of thousands of contracts across the spectrum of industries in the single-stock universe.