Chinese Stock Market Hints at Higher Metal Prices

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Stock markets in China are up nearly 10% this year, outpacing a 4% gain in the S&P 500.

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President Donald Trump’s election victory in November raised worries that his administration would pursue more aggressive policies toward Asia’s biggest economy. On the campaign trail, Trump had threatened to increase tariffs on Chinese exports and label the country a currency manipulator.

FXI China shares attempt to breakout. Source: MetalMiner analysis of @stockcharts.com data.

While these threats haven’t materialized yet, fund managers have focused on healthier Chinese corporate earnings and stable economic data, rather than worrying about protectionism.

Many analysts agree that things might not be so bad since the U.S. stands to lose a lot if they start trade wars. As a result, stock markets in China started the year on the right foot, with indexes now attempting to rise to the highest levels since August 2015.

The Caixin Manufacturing PMI in China continues to rise. Source: TradingEconomics.

The new round of stimulus measures that started late last year boosted spending and growth in China. That has been reflected in the country’s Caixin Manufacturing PMI, which has been in expansion territory for seven straight months. Supply-side reforms intended to address overcapacity in heavy industry also started to take hold, following a four-year spiral of deflation in industrial input costs. We need to remark though, that in industries like steel, these supply-side reforms have yet to be materialized.

Metal Prices Rise With China

Chinese stock market index (in blue) vs. the Industrial Metals ETF (in black). Source: MetalMiner analysis of @stockcharts.com data.

Higher Chinese stock prices would hint at a stronger economy, and a stronger Chinese economy is usually a bullish sign for industrial metal prices. This relationship has been really strong since China became the world’s top producer and consumer of commodities. In the chart above we can see how these two markets bottomed out in early 2016.

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Both metal prices and China’s stock market have trended up ever since and momentum has picked up since the start of 2017. Things continue to look bright for industrial metal investors this year.

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