Muzinich Weekly Market Comment: Copper blues

July 14, 2025

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In our latest roundup of key developments in markets and economies, we look back on another week dominated by tariff headlines.

Price action last week was subdued across most asset classes. Government bond yields were relatively unchanged, while corporate credit markets stayed rangebound, with investors focused on coupon clipping. The US dollar traded sideways, as did energy markets, despite OPEC+ announcing a further production increase of 548,000 barrels per day for August.^[1]

Equity markets were broadly positive, with Europe outperforming while Latin America lagged. The Bloomberg World Large & Mid Cap Index closed the week up 0.75%.

The relative lack of price movement may be attributed to market fatigue, the usual summer lull, or a light economic data calendar that offered little in the way of new information.

Deflating news in China

Among the week's key economic highlights, data from China showed that deflation continues, despite the government’s best efforts. In June, the Consumer Price Index declined 0.1% month-on-month, following a 0.2% drop in May, and was down 0.1% year-on-year for the first half.^[2] Meanwhile, the Producer Price Index fell 0.4% in June, and dropped 2.8% in H1.^[3]

The key drivers of persistent deflation include elevated US tariffs on Chinese goods, declining export demand and income expectations, and prolonged weakness in the domestic housing sector. Together, these factors continue to outweigh the government’s efforts to revive the economy, which have concentrated on boosting consumption.

In Europe, there was more disappointment for the UK government. The economy contracted for a second consecutive month, with businesses and consumers struggling to recover from the impact of US tariffs and domestic tax hikes. GDP declined 0.1% in May, following a 0.3% contraction in April.^[4] If output falls by 0.4% or more in June, the UK economy will post a negative reading for the second quarter, a sharp reversal from the 0.7% growth recorded in Q1.

In the US, the release of the June 17–18 Federal Open Market Committee meeting minutes revealed that the Fed views monetary policy as moderately restrictive but believes caution is justified while awaiting further clarity on the economic outlook.^[5] Committee members emphasized the importance of keeping inflation expectations anchored, particularly as the effects of US tariff and immigration policies continue to filter through the economy.

While the timing, magnitude, and duration of these policy impacts on growth and inflation remain uncertain, the Committee generally expects them to ease in the second half, clearing the way for a cut to the federal funds rate before year-end. Reflecting this outlook, the Overnight Index Swap (OIS) market is currently pricing in a 70% probability of a rate cut at the September FOMC meeting.^[6]

The Greatest Showman

With little else to draw investors' attention, Donald Trump took centre stage (again) last week. Ever the showman, he did not disappoint. His first major announcement was that no extensions will be granted beyond the August 1 deadline for reciprocal tariffs. This was followed by the unveiling of the first in a series of anticipated letters threatening increased tariff rates on key trading partners if agreements are not in place.^[7]

Beginning August 1, goods from Japan and South Korea will face 25% tariffs. The same 25% rate will apply to imports from Malaysia and Kazakhstan, South Africa will be subject to a 30% tariff, and Laos and Myanmar will face 40% levies. President Trump told NBC News he plans to implement a 15–20% tariff rate on most remaining trading partners.^[8]

However, there are two notable exceptions, Canada and Brazil. Trump threatened to impose a 35% tariff on select Canadian goods, effective August 1. This marks an increase from the existing 25% tariff currently applied to US imports from Canada not covered under the US-Mexico-Canada Agreement (USMCA). In a letter to Canadian Prime Minister Mark Carney, Trump criticized Canada’s trade practices, stating the country maintains numerous “tariff, non-tariff policies, and trade barriers” that contribute to unsustainable trade deficits for the United States.^[9]

The threat against Brazil cannot have been driven by perceived unfair trade practices. Brazil has consistently imported more goods from the US than it exports and run a persistent trade deficit with the US for many years. In 2024 alone, Brazil spent US$7.4 billion more on US goods than it earned from exports to the US.^[10]

Despite this, Trump announced the US will impose a 50% tariff on all goods imported from Brazil, effective August 1. After factoring in sector-specific tariffs and exemptions, Brazil’s new average effective tariff rate on US exports will rise from 10.5% to 36.1%.^[11]

This leaves Trump’s rationale for targeting Brazil political rather than commercial. In his letter to Brazil, posted to his social media account, Trump said he was making the change “due in part to Brazil’s insidious attacks on free elections, and the fundamental free speech rights of Americans”.^[12]

If the new tariff rate were to come into effect, it could have a significant impact on Brazilian growth. This comes at a challenging time for the country’s president Lula, already facing a slowing economy, fragile fiscal outlook, and rising voter dissatisfaction ahead of next year’s election. We expect US-Brazil negotiations to continue, especially as invoking the International Emergency Economic Powers Act seems difficult to justify given the US trade surplus with Brazil.

Get ready for the backlash

However, if this is another example of Trump’s efforts to infringe on the sovereignty of other nations, similar to his actions with Canada, Panama, the renaming of the Gulf of Mexico, or attempt to gain control of Greenland from Denmark, it could backfire. Such moves are likely to galvanize nationalistic support for Lula on the grounds of sovereignty, strengthening his position at a time when he might otherwise have faced a high risk of losing the next election.

Beyond headlines about reciprocal tariffs, an overlooked risk is President Trump’s announcement of 50% tariffs on copper imports, starting August 1.^[13] This could severely impact US manufacturers across industries like autos, construction, and appliances, where copper is vital. It is currently unclear which copper products will be affected, but the US imported around 908 kilotons of copper in 2024, mostly refined, with a net import dependency of 45%.^[14]

The domestic shortfall stems from both insufficient mined and scrap supply and limited smelting/refining capacity. Rebalancing this would require boosting primary and secondary supply, partly by reducing scrap exports and expanding domestic refining. However, the high capital cost and long timelines for mining or smelting projects, combined with policy uncertainty, make near-term investment unlikely. Even under ideal conditions, restoring the copper trade balance would take at least 3–5 years.

In the meantime, US copper prices are projected to rise by as much as 40% from pre-tariff levels, assuming only partial demand destruction.^[15] The actual impact will depend heavily on the elasticity of domestic copper demand. As shown in our ‘Chart of the Week’, copper prices on the New York Mercantile Exchange have already surged by 25% compared to those on the London Metal Exchange.

The tariff represents a textbook case of a supply shock that could simultaneously dampen growth and drive inflation higher.

Chart of the Week: Copper price shock

Source: London Metal Exchange, New York Mercantile Exchange, Copper prices, as of July 11, 2025. For illustrative purposes only.

References

[1] OPEC, ‘Saudi Arabia, Russia, Iraq, UAE, Kuwait, Kazakhstan, Algeria, and Oman reaffirm commitment to market stability,’ July 05, 2005
[2] National Bureau of Statistics of China, CPI June 2025, July 10, 2025
[3] National Bureau of Statistics of China, PPI June 2025, July 10, 2025
[4] Office for National Statistics, GDP May 2025, July 11, 2025
[5] US Federal Reserve, ‘Minutes of the Federal Open Market Committee,’ July 10, 2025
[6] Bloomberg, World Interest Rate Probabilities,’ as of July 11, 2025
[7] The White House, ‘President Donald J. Trump Continues Enforcement of Reciprocal Tariffs and Announces New Tariff Rates,’ July 7, 2025
[8] NBC News, ‘Trump readies blanket tariffs as he brushes off inflation worries,’ July 11, 2025
[9] Politico, ‘Canada pauses new tariff threats as Trump escalates,’ July 11, 2025
[10] Office of the US Trade Representative, Brazil Trade Summary, January 2025
[11] Bloomberg, ‘50% US tariff puts 1% of GDP at risk, boosts Lula,’ July 12, 2025
[12] CNN, ‘Trump threatens 50% tariffs on Brazil if it doesn’t stop the Bolsonaro ‘witch hunt’ trial,’ July 11, 2025
[13] Bloomberg, ‘Copper Market in Turmoil as Trump Touts 50% Tariff on US Imports,’ July 9, 2025
[14] US Geological Survey, ‘Mineral Industry Surveys,’ December 2024
[15] Bloomberg, ‘Trump hikes Brazil tariff rate to 50%, sending assets reeling,’ July 9, 2025

 

This material is not intended to be relied upon as a forecast, research, or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed by Muzinich & Co. are as of July 14, 2025, and may change without notice. All data figures are from Bloomberg, as of July 11, 2025, unless otherwise stated.

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