Copper’s Clue: How the Red Metal Forecasts Trends in the China A50 Index

04 Feb 2025

By Eric Lee, Sales Director, Phillip Nova

Copper, often referred to as “Dr. Copper,” is renowned for its ability to predict economic trends due to its extensive industrial applications. Its price movements frequently serve as a barometer for economic health, influencing and sometimes forecasting the performance of equity indices, including the China A50 Index Futures.

Recent Movements in Copper and the China A50 Index

In 2024, the China A50 Index Futures experienced significant growth, taking the lead from the rise in Copper Futures prices:

February to May 2024: The index rose by 14%.
August to October 2024: It surged by 41%.

Notably, during the August rally, the China A50 Index began its ascent approximately 1.5 months after copper prices had bottomed out, suggesting a potential leading relationship.

From 2 January to 17 January, copper prices have increased by 10% indicating renewed industrial demand and economic optimism.

Understanding the Correlation

The relationship between copper prices and economic indicators is well-documented. Copper’s extensive use across various sectors makes its demand a reliable leading indicator of global economic health. For instance, the year-over-year change in copper price correlates well with that of the ISM Manufacturing PMI, a key indicator of the state of the U.S. economy. This correlation suggests that shifts in copper prices can provide early signals of economic expansion or contraction.

Implications for Traders and Investors

The observed lag between copper price movements and the China A50 Index suggests that monitoring copper can offer valuable insights:

Predictive Indicator: An uptrend in copper prices may signal forthcoming strength in the China A50 Index, providing traders with a potential early entry point.
Strategic Positioning: Investors can adjust their portfolios by increasing exposure to Chinese equities following a sustained rise in copper prices, anticipating a subsequent rally in the index.
Risk Management: Conversely, a decline in copper prices might indicate an impending downturn, prompting investors to adopt defensive strategies.

Conclusion

The interplay between copper prices and the China A50 Index underscores the importance of inter-market analysis. By closely monitoring copper’s movements, traders and investors can gain actionable insights into potential shifts in the China A50 Index, enabling more informed decision-making in the dynamic landscape of financial markets.

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An Exchange Traded Fund (ETF) is a marketable security that is formed to track nearly anything, ranging from a specific index, sector, commodity, or increasingly, theme. They are most commonly used to track a basket of stocks, and can typically be accessed through the same channels as regular stocks. ETFs are typically separated into passively-managed ETFs that simply mirror the security they are tracking (e.g. the STI), and actively managed ones that attempt to deliver higher returns or specific investment objectives, often with a pre-specified theme in mind (e.g. ARK Invest’s Innovation ETF).

Why should I trade in ETF CFDs?

ETFs have been growing in popularity over the years. 2020 was the best year for ETFs yet, with global equity ETFs seeing more than $1T in inflows within a 12-month period. Using CFDs to gain exposure to ETFs allows for greater capital efficiency because only a portion of the contract value is required as margin to establish a position.
ETFs are particularly popular with investors seeking a relatively hassle-free investing experience, while desiring exposure to a range of specific and relatively understandable securities. Trading ETF CFDs brings greater convenience by eliminating the need for traders to hold multiple currencies in order to access global ETFs.
An investor wanting exposure to the post-pandemic economic recovery could open a position in the well-known SPDR S&P 500 ETF (SPY), which tracks the performance of the S&P 500. Another investor that may be convinced of the future importance of Environmental, Social and Governance concerns (ESG) may find the increasing selection of ESG-themed ETFs that track a basket of high ESG-rating companies to be a good investment, rather than cherry-picking individual equities by hand. ETF CFDs can act as a powerful tool for traders can profit from both directions of the market by taking on long or short positions.

A look at two ETF CFDs we offer:

1) Has the ARKK been sunk?

ARK Innovation ETF (ARKK) ARKK is an actively managed ETF by ARK Invest that invests in a range of companies based on their innovative and industry-disrupting potential. ARKK’s largest holdings are in companies such as Tesla, Square, and Zoom. ARKK is down around -33% from peaking on 12^th Feb and is currently in the red for the year to date as the market experiences a risk-off outflow of funds. Superstar fund manager Cathie Wood has however been consistently doubling down on her bets, buying even more shares in growth stocks that are going through their own tumultuous periods such as DraftKings, Peloton, Teladoc, and Tesla. In her view, ARKK is playing the long game, and remains steadfastly convinced in the long-term prospects of these growth stocks beyond this current bout of volatility. Similarly on outflows, investors are still betting big on ARKK as ARK Invest has only lost about $1.2B in assets this year across all its six funds, compared to seeing an inflow of $15.1B during the same period. Recently, investors have been nervously eyeing ARKK’s basket of tech stocks as their future earnings potential remain vulnerable to erosion through high inflation – the dominant concern of the market in recent weeks. As commodities – the major contributor to the recent heightened inflation fears – drops sharply from record highs, are investor concerns over hyperinflation overblown?

2) Searching for exposure to Asian equities?

iShares MSCI Asia ex Japan ETF (AAXJ) The AAXJ is currently trading -10.6% adrift of all-time highs seen in February, giving up gains in tandem with an Asia-wide equity sell-off at the time. Given that slightly over 40% of the ETF’s holdings are based in China, the ongoing tumult seen in Chinese equities currently have carried over nearly perfectly in the AAXJ, as Chinese investors take a breather after the stellar gains made over the past year. Looking ahead, Asia – and particularly China, is steaming ahead with its economic recovery. China is widely expected to be one of the best-performing major economies this year, providing a major boost to the outlook for corporate earnings. As the rest of Asia and the world gradually opens up their own economies, AAXJ is likely to again benefit from strong Asian outperformance amidst a strengthening trade outlook.

CFD is available for trading on Phillip MetaTrader 5 (MT5).

Features of trading CFD:

Trade in both the bull and the bear markets
The ability to enter a long and/or short position allow traders to take advantage of both rising and falling markets.
Smaller barrier to entry
Flexible and smaller contract sizes. This means that traders will be able to enter into a contract with a modest amount of capital.
No expiration date or risk of delivery
Unlike futures which commonly have a fixed expiration date, CFD allows traders to perpetually hold the position(s). CFD is cash settled, no need to worry about the delivery of the underlying asset.

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