RISING RATES PUNISH GOLD -- BASE METALS AND MINERS ARE ALSO FALLING -- CHINA WEAKNESS MAY EXPLAIN WHY -- FALLING COMMODITIES AND WEAK CANADIAN DOLLAR PUSH CANADA ISHARES BELOW 200-DAY AVERAGE -- INSURANCE ETF GETS A BOOST FROM RISING BOND YIELDS
GOLD ASSETS ARE ALSO FALLING... Add gold and gold miners to the list of former safe havens that are weakening. Chart 1 shows the Gold SPDR (GLD) falling to a seven-week low today and back below its moving average lines. Gold miners are doing even worse. Chart 2 shows the VanEck Vectors Gold Miners ETF (GDX) threatening its March low. The GDX failed a test of its 200-day average in mid-April and has been leading the price of gold lower since then. Part of that weakness is that bond yields may be starting to climb again. Rising rates are bad for non-yielding assets like gold. Industrial metals like copper and steel, however, are also falling along with stocks tied to them. Rising rates may have something to do with that as well, but not in the U.S.
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Chart 1
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Chart 2
INDUSTRIAL MINERS ARE ALSO FALLING... Base metals have also come under heavy selling over the last two months, along with mining shares tied to them. Chart 1 shows the iPath Bloomberg Copper ETN (JJC) peaking in February and falling back to its 200-day average. Iron ore and steel prices have also fallen sharply which has hurt miners tied to those commodities. And their charts reflect that. Chart 4 shows the Global X Copper Miners ETF (COPX) in danger of closing below its 200-day moving average. Chart 5 shows the VanEck Vectors Steel ETF (SLX) in danger of doing the same. [The S&P Mining and Metals SPDR (XME), which is dominated by steel shares, looks pretty much the same]. Aluminum shares have also fallen but by a lesser amount. It's a little harder to explain the sudden drops in industrial metals and miners. Part of the explanation, however, may be tied to developments in their biggest importer which is China.
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Chart 3
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Chart 4
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Chart 5
CHINA A-SHARES WEAKEN ... Base metals are usually tied to the ups and downs in the Chinese economy. That's because China is the world's biggest importer and user of those commodities. In fact, today's sharp drops in iron ore and steel started in China. That effects Chinese stocks which are also weakening. Chart 6 shows the Deutsche X-trackers CSI 300 China A-Shares ETF (ASHR) trading below its 200-day average today. [A-Shares represent stocks traded on the Shanghai and Shenzhen stock exchanges in mainland China]. Notice that the ETF peaked in February and has been rolling over since then. That's about when base metals started rolling over as well. There are two possible reasons for that. Recent reports show a slowdown in Chinese manufacturing, which might dampen demand for those commodities. A more credible reason, however, is a noticeable tightening in Chinese monetary policy. Short and long term rates in China have risen to the highest level in two years. That may be slowing the Chinese economy and reducing demand for industrial metals.
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Chart 6
BLOOMBERG COMMODITY INDEX AT 2017 LOW... Metals aren't the only commodities that are falling. Crude oil has fallen more than 10% since the start of year and is, in fact, the weakest commodity. That's also weighing on the entire commodity complex. Chart 7 shows the Bloomberg Commodity Index ($BCOM) falling today to the lowest level this year. It's now bearing down on its November low. That will be a big test of the direction of commodity prices (and inflation). One country that has a lot riding on the direction of commodities is Canada. Traders there are already reacting negatively to commodity weakness.
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Chart 7
CANADIAN STOCKS ARE FALLING... Canadian stocks are starting to weaken with commodities. Chart 8 shows the Toronto Composite Index (TSX) falling to the lowest level since April. [Miners and energy are its two weakest sectors with losses of -3.7% and 2% respectively. Copper miner Hudbay Minerals is its biggest loser (-10%)]. Canada iShares (EWC) look even worse. The red bars in Chart 9 show the EWC falling below its 200-day average (red circle). The reason for that weaker trend is the falling Canadian Dollar (green bars). As explained in previous messages, a falling foreign currency will cause a foreign stock ETF to fall faster because it's quoted in a stronger U.S. dollar. The weaker EWC is what Canadian stocks look like to an American investor. [The Aussie Dollar and Australia iShares (EWA) are falling today for similar reasons. Except that country is more closely tied to the plunging price of iron ore which is its biggest export. And it exports that to China].
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Chart 8
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Chart 9
INSURERS GET A BOOST FROM RISING BOND YIELDS... Yesterday's message suggested that higher bond yields would boost financial stocks like banks and insurers. And both are getting a lift today from higher yields. Insurers, however, are leading financials higher. The black bars in Chart 10 show U.S. Insurance iShares (IAK) climbing to the highest level in nearly two months. [The IAK includes life insurers, property & casualty, and full line insurers]. Insurers invest most of their income in bonds, and benefit from higher yields. The green bars show the 10-Year Treasury yield climbing as well.
