Metals and mining stocks have 'crashed back down to Earth', strategist says

Base metals rallied on Thursday, but their downward trend over the last several weeks has been flashing recessionary signals.

Copper (HG=F) futures touched a 19-month low this week amid concerns of a recession. The metal used in everything from jewelry to motors and electrical wiring is down about 19% year to date.

"Doctor" Copper is often used to gauge the overall health of the economy.

"Weak commodity prices help ease inflation fears," Fiona Cincotta, senior financial markets analyst at City Index, wrote in a note on Thursday. "However, commodities are on the rise again on news that China is considering a $200 billion stimulus program."

The war in Ukraine and supply concerns sent base metals and other commodities like oil and grains soaring earlier this year. But the pendulum has recently swung the other way. Aluminum futures (ALI=F), which reached a peak in March, have wiped out their year-to-date gains. The metal is down 12% since the beginning of January.

"There was obviously a big premium put on commodities when Russia invaded Ukraine on February 22. That really now has come out of the market," Will Rhind, GraniteShares founder and CEO told Yahoo Finance.

"If you look at all major commodity prices, we're back to where we were before the Russia-Ukraine situation with the exception of one commodity and that's iron ore," he said.

"As quickly as the sector exploded higher from late January until its April peak, it has now crashed back to Earth and is testing its January lows," Jay Woods, chief market strategist for DriveWealth, told Yahoo Finance.

A look at the SPDR S&P Metals and Mining ETF (XME) shows "clearly the Fed’s aggressive rate hike have had an inverse affect on the sector," Woods said. "Add in a supply chain that is starting to ease and demand possibly cooling and that led to the sharp reversal back to 2021 levels," he added.

"The question to me, knowing the market is a leading indicator, are the coming Fed hikes now priced in and we start to build from here or is this a stop in the dam and we could break lower yet again?" Woods asked.

Strategists like Rhind project long term, the metals sector will see tailwinds as the world moves towards a green economy.

“The big picture is that we still have a severe problem on the supply side. And to move to a global state of decarbonization we’re going to need trillions and trillions of dollars worth of money printed, and that’s all good for commodities," Rhind said.

Ines is a stock market reporter for Yahoo Finance. Follow her on Twitter at @ines_ferre

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