Montreal, Canada

Copper prices appear to be forming a double-top. That spells bad news for the commodities complex and the prospects for a continued economic recovery into the second half of 2010.

Both technical and fundamental scenarios are increasingly bearish for this highly cyclical industrial metal whereby China consumes almost 40% of its annual output.

Widely known as "Dr. Copper" among global investors and economists because of its forecasting reliability, copper looks increasingly vulnerable as it loses important technical support levels.

The chart below shows a decisive break below copper's short-term and long-term moving averages and the possibility of a "death cross," or the convergence of 50-day and 200-day moving averages. From a technical perspective, this picture is bearish. It also confirms what appears to be a double-top formation that started in January.

On the supply side, London Metals Exchange (LME) copper warehouses are now full following a massive buying spree by the Chinese over the last 18 months. The Chinese don't buy commodities at high levels – unless absolutely necessary.

China has now begun to hoard copper and has reduced its purchasing muscle over the last several weeks following a price surge that surpassed $3.60 per pound in April.

If copper prices, which have skyrocketed 155% since January 2009, have indeed peaked then what does that portend for the world economy?

Copper's decline is important to the global growth story because it could be discounting slowing demand over the next several months. Although China purchases almost half of the worlds' copper, the slowdown underway in Europe won't be good for raw materials – especially in countries on the credit crisis firing line.

Most sovereign government bond markets in the industrialized world have been rallying sharply since May and could be forecasting a renewed slowdown or economic recession over the next 6-12 months. The difference between 2-year Treasury bond yields and benchmark 10-year Treasury bonds has narrowed from 282 basis points (2.82%) on March 31 to 253 basis points this morning. This spread, which is still compressing since May, usually spells trouble for the economy as long rates converge with short-term rates.

European economic output will be impacted by the credit squeeze. We still don't know to what extent global growth will be adversely affected. A default is imminent somewhere, probably in the Balkans or Eastern/Central Europe.

German growth should rebound smartly on the heels of a weak EUR, but most other economies will be saddled by spending cuts and probably new strikes aimed at domestic bond markets as speculators demand even deeper cuts to spending. The world won't muster a strong coordinated economic recovery without a healthy demand-driven Europe.

The specter of one or more European sovereign defaults is now approaching. It might be Greece, Hungary or some other regional market. But one thing is for sure; the destruction of credit since 2008 still hangs on government balance sheets and most banks like a bad nightmare that won't end. Risk assets will endure a rough summer.