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Don't Expect Copper to Bring Down U.S. Equities

NEW YORK ( TheStreet) -- Recent weakness in iPath DJ-UBS Copper TR Sub-Idx ETN (JJC) may not justify a strong selloff in U.S. equities.

Copper has taken a beating this past week as negative headlines out of China led investors to question the health of the world's second-largest economy.

Last Friday, Shanghai's Chaori Solar, a maker of solar cells, became China's first company to default on domestic notes when it failed to make a full coupon payment. The default is somewhat acceptable to the Chinese government as it takes steps to rein in excessive borrowing and create sustainable economic growth.

Nonetheless, the Chaori Solar default sparked fears there could be more defaults within the country not limited to solar companies, possibly spilling over into industries with excess capacity like steel and mining, particularly copper.

With fear of less economic activity in the industrial sector already looming, Thursday's slowdown to a mere 8.6% growth in Chinese industrial production for February led the market to dump copper futures.

Copper's sudden decline has weighed on U.S. equity markets, but does not necessarily imply equities will begin a downtrend.

U.S. equity markets: SPDR S&P 500 (SPY), PowerShares QQQ (QQQ) and SPDR Dow Jones Industrial Average (DIA) all have seen selling pressure recently due to unrest in Ukraine, as well as a slowdown in Chinese economic activity.

Unlike large declines in iShares MSCI Emerging Markets (EEM), however, investors remain confident in U.S. fundamentals.

The large advance in U.S. equities over the past year has been fueled by both improving economic numbers and strong corporate performance, neither of which have broken that pattern.

Although analysts see the current lull in both U.S. economic and corporate data as an opportunity for foreign headlines to push equities lower, investors may not agree.

The focus will turn to the Federal Reserve meeting next week for clues on monetary policy, while at the same time investors will watch for potential escalation of tension between NATO countries and Russia.

If neither event presents overwhelming negative sentiment to investors, expect markets to consolidate but correct no more than 5% to 10% off current levels.

SPY Chart
SPY data by YCharts


At the time of publication, the author had no position in any of the funds mentioned.

Follow @macroinsights

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

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