CHART OF THE DAY: THE HANG SENG/BALTIC DRY DIVERGENCE
28 August 2009 by Cullen Roche
6 Comments
The Chinese stock market and the Baltic Dry Index have an extraordinarily high correlation to one another. In recent weeks, however, we’ve seen a sharp divergence. The correlation is primarily due to China’s large export component. Is the Baltic Dry Index forecasting a slow-down in global shipping and thus a slow-down in the Chinese economy? More importantly, is the stock market (in the U.S. and in China) ignoring this potential warning sign? That has yet to be seen, but the convergence of these two indices is likely in the coming months and that either means a surge in BDI or a collapse in HK….Plan accordingly.
I have a very different view. Unsustainable imbalances should be corrected. The excess US current account deficit and the excess China current account surplus cannot and should not continue. Right now, things are correcting.
China prior to 2005 had a minimal current account surplus. China have grew rapidly only a few years ago without needing to run huge current account surplus. In time, China need to get back to that healthier way to grow.
The divergence is a good sign and should stay.
Lastly, this is excellent for the global economy too. This will stimulate domestic production in various economies including the US.
S&P future up to 1035, another new high today?
http://www.bloomberg.com/apps/news?pid=20601087&sid=aOkYkh3CsUFg
“Aug. 7 (Bloomberg) — The Baltic Dry Index, a measure of shipping costs for commodities, had its worst week since October as Chinese demand for shipments of coal and iron ore slowed.”
…
“Chinese Steelmakers
Rates are declining as Chinese steelmakers delay imports while they negotiate annual iron ore prices with producers such as Rio Tinto Group, BHP Billiton Ltd. and Vale SA, Durrell said. “I don’t think they will come back until they agree,” he said.
The drop reflects a wider slide in demand for raw materials that will likely push prices for metals, commodities and energy lower, Eugen Weinberg, a senior commodity analyst at Commerzbank AG in Frankfurt, said by phone yesterday. “
Examining the chart, I see that the BDI tends to lead the HSI by about 2.5 months. The “divergence” from this tendency occurs during the crisis-recognition time frame (Mar08 to Dec08)in which the two indices move coincidently. Presently the lead/lag relation is back in effect and the BDI is now “predicting” a significant decline in HSI.
There is a glut of new ships coming online that were ordered years ago when the BDI was at loftier levels. This is helping to keep rates low.
http://seekingalpha.com/article/132595-shipping-industry-has-too-many-ships-being-built?source=feed
Time to get out of stock market and start shorting high yield currencies.