Just one month ago we talked about the close relationship between emerging markets and commodity prices and how their stock markets were heading into trouble, which could potentially hurt commodity prices.
Weakness in emerging markets continued to spread out, and Chinese stock shares plunged in June.
ARCA:FXI China ishares since 2014. Graph: MetalMiner.
China’s stock market rallied in the first quarter. Then, Beijing suspended initial public offerings to tighten the supply of available stocks, while the Chinese central bank helped to promote brokerages’ margin finance operations, allowing investors to borrow cash to buy stocks. Those actions helped boost stock shares in the short-term, but they have proven not to be sustainable in the long-term.
The Rally That Wasn’t
This rally in China helped support industrial metal prices during the first quarter. As we know, there is a strong link between China and commodities. Base metals like copper rallied during the first months of the year, but those rallies weren’t sustainable. China’s stock market has retraced most of its previous advance, and is in a deeply oversold condition. However, no real sign of buying has emerged to date.
Industrial Metals ETF (NYSE:DBB) starts sinking in May as Chinese stocks plunge. Graph: MetalMiner.
China’s stock market decline is just exacerbating the bearish commodity market, and even more significantly, industrial metals, many of which are now at record lows. Good thing we were already bearish on base metals…