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Over the last several years, Chinese financial markets have gotten enormous attention as their arcane, foreign, and ultimately opaque drivers start to impact global markets. This isn’t just a Chinese economics story. Rather, it’s about how frequently we see headlines, reports, analyses and general focus on rapid appreciation of financial products. Some are easy to understand: real estate or equities. Others are less transparent: copper-backed collateralized lending or wealth management products. Below we chart the 2014-15 stock market surge that was inevitably unwound and suffered the greatest pain in the lead up to China’s surprise currency depreciation last year.
The most recent fad appears to be, of all things, steel rebar futures. Shanghai-traded rebar futures (priced in Chinese yuan) have exploded higher in price since December. Part of this price action has been technical; rebar futures had been declining in an almost straight line since 2011 and were trading similar to iron ore or copper. Both of those have also gained of course; iron ore futures traded in Dalian are up 76.6% since their low on the 10th of December last year. Spot iron ore bottomed 4 days later. COMEX copper bottomed in mid-January. But it’s Chinese local products (hot rolled steel also bottomed on the 4th of December) that have really led the charge. The drivers are complex, as technicals (the extreme oversold conditions) and the likelihood of a wave of government stimulus in China have ramped up.
With the outperformance from miners so far this year on the back of strong metals prices (Stoxx 600 Basic Resources +25% YTD; S&P 500 Mining & Metals +41.1% YTD; MSCI Global Metals & Mining +38.65% YTD), it’s worth keeping in mind that much of the rally in underlying commodities started in China. A weaker US dollar, higher oil prices, and extreme sentiment readings have also supported prices, of course, and may continue to do so going forward. But if Chinese stimulus – and speculative! – hopes don’t pan out, there’s plenty of room for collateral damage outside the country.