DROP IN CHINESE MARKET STARTED WITH JUNE 15 TARIFFS -- SINCE THEN CHINESE STOCKS AND CURRENCY HAVE FALLEN TOGETHER -- AGRICULTURAL COMMODITIES AND BASE METALS PEAKED IN JUNE WITH CHINESE MARKET
MOST COMMODITIES ARE IN THE RED ... Commodity prices have been falling sharply over the last month. And Chart 1 shows where most of the selling has taken place. The black line shows the Invesco Commodity Tracking Fund (DBC) still 4% higher since the start of the year. That's almost entirely due to the fact that energy prices have climbed 16% this year (blue line). The other three commodity indexes are deep in the red for the year. The red line shows the precious metals ETF (DBP) down -5% for the year. That reflects falling gold and silver prices which have been hurt by a rising dollar. The two weakest groups have been agriculture (-7%) and base metals (-15%). Those two are being hurt mainly by the tariff war brewing between the U.S. and China. Tariffs on pork products and soybeans have pushed those commodity prices sharply lower as a result. Soybean prices have fallen to the lowest level in a decade. Our main emphasis today, however, is with base metals which have suffered the most from the trade war between the world's two largest economies. Notice that the lower (magenta) line, which represents base metals, started dropping sharply in the middle of June (see arrow). There's a reason for that. And that's where we'll begin today's story.
Chart 1
CHINA A-SHARES AND CURRENCY STARTED DROPPING IN MID JUNE... Chinese markets started dropping sharply in the middle of June. The red line in Chart 2 plots the Deutsche X-trackers CSI 300 A-Shares ETF (ASHR), while the green line plots the WisdomTree Chinese Yuan ETF (CYB). The red circle shows Chinese mainland stocks dropping more sharply in the middle of June before falling to the lowest level in a year. The green circle shows the Chinese currency turning down at the same time before falling to the lowest level this year. That was the result of a June 15 announcement of U.S. tariffs of $34 billion on Chinese imports to take effect on July 6. China vowed to retaliate the same day. That June tumble in Chinese assets accelerated a decline in emerging market stocks and currencies that had been going on for most of the year. That's also when base metals started to tumble.
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Chart 2
BASE METALS ALSO PLUNGED IN MID-JUNE... The middle line in Chart 3 shows the Invesco Base Metals Fund (DBB) (which includes aluminum, copper, and zinc) also plunging in the middle of June (see circle). That coincided with the plunge in Chinese markets. The top box shows that agricultural markets started falling at the same time. That suggests that the sharp drop in both commodity groups was the direct result of the June 15 tariff announcements between the U.S. and China and resulting weakness in Chinese markets. The lower box shows that precious metals also fell during June, but were already being pushed lower during the second quarter by the rising dollar. It appears that precious metals were negatively impacted earlier by the rising dollar, while base metals (and agriculturals) were more negatively impacted by the June drop in the yuan and Chinese stocks.
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Chart 3
CLOSE LINK BETWEEN COPPER AND CHINA... My three books on intermarket analysis all stressed the close link between Chinese stocks and copper. That's because China is the world's biggest user of copper, and imports nearly half of the world's supply. As a result, that commodity has a tendency to rise and fall with Chinese stocks. Chart 4 shows the very close relationship between copper and Chinese A-Shares over the last year. It shows the mid-June copper peak coinciding with a nine-month low in A-Share prices. And falling together since then. [The chart doesn't reflect today's -3% drop in copper]. The Chinese A-Shares ETF (ASHR) is down nearly 3% today as well. That follows today's announcement of an additional $200 billion of U.S. tariffs on Chinese imports. The box below Chart 4 shows their 20-day Correlation Coefficient jumping to 0.92 this week which is the highest level of the year. Chart 5 shows the strong link also existing between copper and the Chinese yuan, both of which fell during June and are threatening yearly lows today. There's no mystery as to why commodity prices, and agriculturals and base metals in particular, are dropping. Both are tied closely to weakness in the Chinese market. And that's mainly the result of the growing trade war with that country. The drop in those commodities says more about the weaker Chinese market than it does about the state of the U.S. stock market and economy. Which also explains why U.S. stocks and the dollar have held up better than their foreign counterparts since the middle of June.
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Chart 4
