China's impact on commodity prices

China’s muted growth poses a new risk to the slowing global economy, with export data disappointing at -3.1% year-on-year (yoy) in May (3.7% expected) and imports -0.7% yoy in May (6% expected).

This normalised data represents a slowing domestic economy, where imports have further contracted from April’s -0.3% and global demand with exports in April was still in positive territory at 1%. Over the years, there’s been a shift in trade balance between China and the rest of the world. China is dependent on advanced economies for 70% of its exports – 15% to US – and on the flip side; 35 countries depend on China’s consumption where more than 15% of their exports goes into China.  This trade data is a concern for many countries and a tail risk for the rest of the year.

While Premier Li reiterates their tolerance for lower growth to reassure the investment community and looks to rebalance the economy, lack of investor confidence is evident in the lacklustre stock market performance. The Chinese equity market is the worst performing market in Asia with the Shanghai composite in the negative for the year at -12% with forward PE at 8 and current PE at 11, further deterioration is expected in the stock market. Property construction, which has been the main driver of growth, has remained flat and container shipping out of Hong Kong has declined significantly since 2011.

With global growth subdued for the rest of the year, China’s further slowdown and the eurozone recession to drag, clearly commodity prices will not be going anywhere. The question is whether commodities will find a floor and stabilise and possible blips in the upside with surprise data?

Commodity prices have rebounded overnight with copper prices at the highest level since September. Although many analysts have warned this could be a red herring as buyers are using the metal as collateral for credit, the recent burst of activity looks like copper could have a short term upside with support at 311.

Olie - VS Crude continues to have a good run, breaking out from the range it has been trapped in for most of the year. The technical support level will stay at $105 for the short term. Crude oil is now at backwardation with this short-term supply shock. US inventories fell by 9.87 million barrels according to the Energy Information Administration. The gap between Olie - Brent Crude and WTI is closing with Brent trading at $108.31 and WTI at $106.41.

Gold and silver

Precious metals had a nice run with gold gaining 1.8% to $1282 and silver rebounding up over 3% to 19.76 after Fed minutes showed tapering is off the table for the time being. The highly-anticipated FOMC minutes showed disagreements between committee members. While the investment committee was looking for answers to when the tapering might occur, the minutes showed further improvement in the labour market is needed. 

Singapore

In Singapore, trading should be in consolidation mode after a 114-point recovery from a low of 3074 on 24 June and ahead of the GDP announcement tomorrow. Property IPO continues to dominate in Singapore and Hong Kong, New Century REIT had their trading debut yesterday in the HSI, barely holding above their offer price of HK$3.5 during trading before closing at HK$3.52.

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