Articles in Category: Macroeconomics

A continuation of the sell-off in Chinese shares, worries about bearish commodities markets with crude oil at $40/barrel and a dash of Federal Reserve rate-hike fear, made US equity investors throw in the towel in August.

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US stocks suffered their worst losses in four years.

S&P 500 since 2014

S&P 500 since 2014. Graph: MetalMiner.

We recently analyzed the fall in US shares and how both stocks and commodities markets seem to be linked now that all eyes are on China.

Chinese Sentiment Still Bearish

It looks like, for the coming weeks, investors’ sentiment will be driven by what comes out of China.

CRB commodity Index since 2014

CRB commodity Index since 2014. Graph: MetalMiner.

Interestingly, both commodities and US stocks bounced last week after the big drop. These rallies are normal price fluctuations after a sharp drop.

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However, this rally doesn’t look convincing, making us suspect that the fall in U.S. equities and commodities might not be over.

China Ishares (FXI) since 2014

China Ishares (FXI) since 2014. Graph: MetalMiner.

Meanwhile Chinese shares keep making new lows and nothing suggest that we’ve reached a bottom.

What This Means For Metal Buyers

China’s stock market crash doesn’t look like it’s over yet. Further declines in Chinese shares could propel more price declines in commodities and US stocks as China seems to be driving investors’ sentiment at this moment.

US stocks plunged about 2% on Tuesday, the first day of trade for September, as weak Chinese data pressured global markets.

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The Dow Jones industrial average traded about 320 points lower in correction territory, after earlier falling as much as 360.83 points. The Nasdaq Composite wiped out gains for 2015 and struggled to stay out of correction. The S&P 500 is within 1% of correction territory as of this post.

China’s official manufacturing purchasing managers’ index (PMI) edged down to 49.7 in August from 50 in July, while the final Caixin/Markit manufacturing PMI came in at 47.3 in August, the lowest reading since March 2009.

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The Federal Reserve’s No. 2 official said there is “good reason” to think sluggish US inflation will firm up and move back toward the central bank’s 2% annual target, touching on a significant assessment facing the Fed ahead of its September meeting.

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Vice Chairman Stanley Fischer told participants at the Federal Reserve Bank of Kansas City’s annual economic symposium in Jackson Hole, Wyo., that inflation likely will rise to the central bank’s annual target of 2%. This is despite low oil and import prices which are keeping prices of everything else lower.

Market Stability?

“Given the apparent stability of inflation expectations, there is good reason to believe that inflation will move higher as the forces holding inflation down – oil prices and import prices, particularly – dissipate further,” Fischer said.

Many, including my colleague Stuart Burns, wrote that it would be unlikely for the Fed to pursue rate hikes, at least in the short term, after China’s stock market collapse. The head of the Fed’s New York branch, William Dudley, even said that the argument for a rate rise in September had diminished, markets took Fischer’s comments as relatively bullish, especially compared to Dudley’s.

Fischer’s comments seem to indicate that the Fed could raise rates as early as its September meeting.

In an interview last week with CNBC, Fischer said that before the recent turbulence in global financial markets, “there was a pretty strong case” for a rate hike at the September 16-17 meeting, though it wasn’t conclusive. “The Fed’s made it perfectly clear that the first rate hike doesn’t mean there will be a second or a third within three to six months – we just need to get our first one out of the way.”

What This Means for Metal Buyers

If that first rate hike does come in September, then we could expect lower prices for many of the metals we track. Higher interest rates tend to lead to supply increases in storable commodities such as aluminum and copper; they make it more appealing for miners to pull ore out of the ground today instead of tomorrow.

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They also goad speculators into moving out of spot commodity contracts and into something with a better yield.

 

After the market tumult of last week, many expected things to calm down and that China’s stock market would finally calibrate to the new, devalued yuan/renminbi while equity markets elsewhere would bounce back from Friday’s big sell. Heck, maybe even the beleaguered commodity markets might recover some of their losses, right?

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Wrong. Oil reentered a bear market on Tuesday extending the previous day’s losses, when Brent crude — the international benchmark — recorded its biggest one-day sell-off since February. After dropping more than 6% on Monday, Brent fell a further 2% in the next trading session to $55.40 a barrel. It is down more than a fifth from its year-high of $69.63 a barrel reached during intraday trading in May.

Not the Oil That Made Jed Clampett Rich

Not such a good time for oil companies but, at the very least, gas prices are down here in the US and costs for everything from construction to automobile production is down, too, right, so we must be on to step three, profit, right? Oh no, not even close. Construction material prices are down, but new construction spending isn’t exactly picking up, either. Not here and not in China, where lack of demand has led lead and zinc to five-year lows.

Jedclampett

Jed Clampett made $9.5 billion in oil and gas. That likely would not have happened with today’s prices.

Incidentally, Forbes estimated Jed’s net worth at $9.5 billion, 4th on its “Fictional 15″ list. That’s more than weapons tycoon Tony Stark (#6). Not bad for wealth based entirely on oil and gas discovered while hunting possums.

A Rebound in Stocks… Of Sorts

The Dow Jones Industrial Average has been back in positive territory, though, saving our collective retirements and paring the losses we saw last week. The Dow gained 369 points yesterday, alone, curbing the big losses from Friday and Monday. It’ll surely last, right? Ummm, no promises. While our own Stuart Burns acknowledged the rebound in western markets, he also cautioned that aftershocks from China’s economic crisis could be forthcoming.

“With (Chinese) GDP growth widely believed to be lower than the official government number of 7% it is hard to see how domestic consumption can pick up as households lick their wounds,” Burns wrote.

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So, in short, expect more volatility as China spares the rod of economic depression while spoiling the child with purposely devalued currency.

What Does This Mean for US Buyers?

Expect to pay less for Chinese steel. We know, it’s already dirt cheap as foreign imports were up 5% in July. The job of policing foreign dumping into the US market just got tougher.

 

Nickel has already halved its year-to-date value after peaking in May 2014.

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This week, prices fell below the $10,000 per metric ton, a physiological resistance level. Prices are now approaching the record low of 2009 when prices hit $8,850/mt. If so, nickel would be the first industrial metal to fall below recession levels.

3M LME Nickel below $10k and approaching record lows

3-month LME Nickel below $10,000 and approaching record lows. Graph: MetalMiner.

The slump in prices made some producers cut output and we’ve heard people talking about a price spike as producers are underwater. But as you are aware, production costs do not determine prices, investors do.

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The bearish momentum in China’s stock market and the commodities markets will keep a lid on nickel prices and, in our view, prices could keep sliding. Why not? They’re already nearing the lows of 2009.

Stock markets around the world have rebounded after Monday’s dramatic falls, even so pension and investments funds have been severely depleted even after the bounce back.

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In China, though, where it all started, the market has continued to fall, down another 7.6%. When the Shanghai Market last “corrected,” Beijing stepped in with a $400 billion fund to buy stocks, ordered state-owned companies to buy shares, banned large shareholders from selling and even launched a criminal investigations into short sellers in a desperate effort to prop up the market.

Chinese Stocks Still Falling

Clearly, although that bought a temporary calm it has not lasted and the market went into free fall again this week. Tellingly, Beijing has not stepped in this time, acknowledging that even China does not have the funds to turn global equity markets. Li Jiange, vice chairman of state-owned investment company Central Huijin is quoted by the Washington Post as saying “The trade volume of the market can reach 2 trillion yuan ($300 billion) a day, which means if it collapsed no one could save it,” adding “The issues of the market should be handled by the market itself.”

US dollar vs. RMB

Beijing’s way out involves producing in yuan and selling in dollars.

This time, the Peoples Bank of China have simply cut interest rates, for the fifth time in nine months, by a quarter percent to 4.6%. It also cut its one year deposit rate to 1.75% in a vain attempt to bolster the economy, and reduced banks reserve requirements in another attempt to get them to lend more. Read more

Well for one thing it means our retirement funds will likely be worth less, at least in the short to medium term. On the plus side, our mortgage will likely stay cheaper for longer and metal prices will remain lower for longer.

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Why? well if the Fed was worrying about a China slowdown in July, they must be in full-on panic mode by now. If the Federal Reserve was to raise rates next month, to stave off the possibility of inflation picking up next year, it would strengthen the dollar, making imports more attractive and making life tougher for US exporters.

China’s Deep Slowdown

The collapse of stock markets around the world has been precipitated by fears of a China slowdown becoming far deeper and more prolonged than previously thought – although why this appears to be such a surprise to investors today compared to 2-3 weeks or even 2-3 months ago I fail to see, the writing has been on the wall all year.

Traders in London

The signs that China’s economy could lose steam were there, but it still caused global stock market panic.

However, as the herd mentality sets in all those stop orders get hit and the fancy algorithms cut in selling stocks and becoming self-fulfilling as they drive prices down. Hedge funds have been aggressively shorting the market, not just for stocks but for commodities too. It would be a brave man who bet any pause was the start of a bounce back, markets could have a lot further to fall.

Back to the Fed and China: weaker demand from China will mean lower demand for commodities. For a few commodities, China has become a net exporter but across the board the world’s largest consumer is reversing what was once a one-way bet on demand. Read more

China’s stock market crash continued last week as the country devalued its currency. Although US equities were showing resilience against global economic weakness, last week the picture changed completely.

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The last sell-off in Chinese shares, worries about bearish commodities markets with crude oil at $40/barrel and a dash of Federal Reserve rate-hike fear, made US equity investors to throw in the towel last Friday.

S&P 500 falling sharply breaking support

S&P 500 falling sharply breaking support. Graph: MetalMiner analysis of @stockcharts.com data.

US stocks suffered their worst losses in four years and the technical picture looks at least worrisome. All major indexes fell in heavy volume, breaking a key support level that was established this year.

Correction?

Some people might argue that the market is in a normal correction and, therefore, Friday left a good opportunity to buy a dip. Although that could be the case, we believe this could be the first leg of a further decline in US shares.

When a market refuses to rally from a sharp decline like the one we had Thursday and Friday, it’s a sign that institutions are selling big blocks of stock. This is also happening after the general market had an extended advance (the stock market barely had a correction since 2012) and now the amount of supply (all the people and funds that are holding stocks) can overwhelm the indexes as investors flee stocks to lock in profits.

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Indeed, in the black Monday of 1987 the market had had a similar advance prior to the crash. The chances of a similar crash are not high but you get the point.

All this is just making investors to keep a closer eye on China and a growing concern about China’s economy is pushing commodities down.

CRB commodities index in free fall

CRB commodities index in free fall (2014-today). Graph: MetalMiner analysis of @stockcharts.com data.

The CRB commodity index keeps making new lows. Now both the US stock market and commodities markets seem to be linked and sharing a common driver: China.

What Does This Mean For Commodity Buyers?

Now that all eyes are on China, both commodities and US shares might start moving together and the plunge might stop once the sentiment on China changes. When will that be? Nobody knows, but it doesn’t look like we are there yet…

The answer as you can imagine is not a simple one, it will impact prices in a number of ways and different commodities will be impacted in different ways.

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So far, it has been seen as a bearish development mostly for macro reasons – that Beijing felt the need to allow the currency, the yuan/renminbi, to fall to bolster export industries, particularly manufacturing. It is certainly true that real GDP growth is slowing and is probably already under 7%.

aluminumingots_500

Oversupply of aluminum could get worse with a devalued renminbi.

Worse, most of the sub-indexes in China’s General Manufacturing Purchasing Managers’ Index have weakened this month, with output, new orders, new export orders and employment all deteriorating. Up to now, the employment prospects for China’s 10 million new entrants each year had held up well, but some indicators show the job market is weakening according to the Financial Times. Read more

The selloff in Chinese stocks continued today and a major Japanese automaker has turned low steel prices into a cut in its supply costs.

Chinese Stock Market Still Falling

Chinese stocks plummeted Monday, erasing gains for the year, as fears about the deepening effects of a slowdown in the world’s No. 2 economy rattled investors world-wide.

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The Shanghai Composite Index closed down 8.5% at 3,209.91, bringing its losses since its mid-June peak to nearly 38%.

China’s main stock index has now tipped into negative territory for the year after gaining as much as 60% through its June peak. Benchmarks in Japan and Australia both shed nearly 4%.

At the heart of the selloff is the concern that the once-strong Chinese economy may be slowing down dramatically, which has triggered steep losses in global stock markets, commodities and emerging markets.

Toyota, Steel Suppliers Agree to Price Cut

Toyota Motor Corp. and major Japanese steel makers have agreed to lower prices for steel sheet for the April-September period, marking the first price cut in a year, industry sources told the Japan Times on Thursday.

Toyota and the steelmakers, including Nippon Steel & Sumitomo Metal Corp., reached the agreement as prices for iron ore and coal have dropped precipitously and are not expected to rise soon.

Free Download: Latest Metal Price Trends in the August MMI Report