The saying used to be, “the U.S. sneezes and the world catches cold” and this can now be applied to China as well with the impact of the Chinese slowdown felt on markets from London to New York.
The fear of contagion from a Greek default and a possible exit from the eurozone, has hogged the headlines and markets for weeks, but suddenly the meltdown on Chinese equity markets and the resultant contagion, has become the big story.
The major Chinese index, the Shanghai Composite index (SHCOMP, -4.60%) has lost almost 30% of its value over the past 3 weeks, 13% of which has been in the month of July alone. The smaller but no less important Shenzhen Composite Index (399106, -3.24%) has been equally hard hit.
The selloff that has taken place over the last month has seen $2.4 trillion knocked in value from China’s equities, although on average, Chinese shares are still up 81% year to date and 15% higher than in January of this year. Chinese efforts that have included four interest rate cuts since November and a new campaign for buying blue chip shares to stem the selloff tide, have not met with much success.
According to Brian Lundin of the Gold Newsletter, “The concern, of course, is that the underlying Chinese economy is weaker than thought, or that a significant decline in the nation’s equity markets will upset the fragile financial system and further damage the economy”.
Meanwhile, the lower demand for copper and other metals from China has resulted in the price falling to levels last seen in 2009 when September copper (HGUS, -0.84%) declined by 9.15 cents to close at $2.4465 a pound on Comex.
The effect was felt in London where commodities giant Glencore saw its shares fall 17 pence to a record low of 230.6 pence as the prices of copper and iron, the two big industrial metals, recorded big price declines. The other industrial metals producer to feel the pressure was Anglo American which was down 50.9 pence to 832.3 pence.
Added to this, the FTSE 100 felt the tremors from the fall in commodity prices when the index fell 103.47 points to 6,432.21.
Referring to copper market fears, Colin Cieszynski, the chief market analyst at CMC Markets said that “the plunging stock market could destabilize the economy and impact resource demand”. He added that “copper is now at a big turning point.” Cieszynski `further expressed the view that if copper doesn't bounce back above $2.45 soon, it could be a bear trap washout and could signal a bottom. That is, $2.45 could become the new resistance level with a price of $1.95 being tested as a bottom.
Cieszynski also said that it could take Chinese markets a while to sort themselves out after such a big shock, but “once markets stabilize and traders can assess the damage, resources could stabilize as well”.