TWO INTERESTING DIVERGENCES…
While the markets have continued to melt higher on the hopes of perpetual Fed easing and “better than expected” earnings, some interesting divergences are occurring. In particular, copper prices and the Shanghai Composite are in retreat. The Shanghai Index has proven to be a particularly good leading index in recent years. While the recent divergence is short-lived it is worth keeping an eye on. Slower growth in Asia would be foreshadowed by their equity markets (which have a very high correlation with commodity prices and copper in particular) and as I’ve continually said – slower growth in Asia would be very troubling for a western world that is barely gripping onto a sustainable recovery.
The Shanghai Composite is down 5% in the last few weeks
Copper just can’t seem to catch a bid in this raging commodity bull market
I feel like the SSEC is late cycle and thus not a good barometer for the SPX; didn’t it get cut for ~45% from 04-05 as the SPX consolidated and then continued to move higher? Obviously the Chinese growth story was well entrenched and underway at that point given the performance of CAT/X, etc. at the time, yet Chinese equities failed to participate. Pretty strange.
Also, you know the copper story these days – tough to say what is or isn’t driving its price vs. supply and demand given the hoarding going on.
The more interesting divergences might be the following:
- Bond yields continue to decline noticeably vs. higher equities
- The XLP, XLV and XLU sectors have been relative strength and breakout leaders recently (Pharma was the single best industry performer in April as of yesterday) with the cyclical areas begrudgingly following
- The Citi economic surprise index is now at 0, which you have pointed out before
Absolutely a great point here. Personally, I think copper is headed back to new highs soon, but it was due for a pull back and seems to be consolidating in this range.
I would not be short any materials here though given China’s 5 year plan and the Japan rebuilding that must take place.
US home market is likely dead for another 5 years I would guess, so that shouldn’t provide much demand I think.
India/Brazil are wildcards though, even though Brazil has better options re copper access.
I have been beaten to death by divergences and common sense for two years.
Really reminds me of 2000 and 2008.
Jon – a great point. I really think we’re in a situation where it’s way too easy to overthink stuff. Until further notice, we’re in a super strong bull market in everything (except the USD)
Copper, the re-export factor
Posted by Izabella Kaminska on Apr 28 17:21. 5 comments | Share
We’ve already referred to the latest Reuters Metals Insider report on Thursday, but somehow we feel that the following is worth a special mention of its own.
That is, what happens when the government attempts to rein in innovative Chinese financing schemes like those using copper as collateral?
In one (hyphenated) word: Re-exports.
In other words, more copper shenanigans.
As Reuters explains regarding the accumulated copper stocks in bonded warehouses in China (our emphasis):
However, there is a flip side to this bonded stocks build. As the Chinese authorities clamp down on the practice of using copper as collateral to bypass tighter bank lending criteria, holders are finding it harder to roll over financing arrangements.
They are responding by re-exporting copper in ever greater quantities, a tax-neutral turnaround since VAT is only payable on imported copper at the point it is sold to a mainland buyer.
Exports, more likely “re-exports”, surged to a five-year high of 36,800 tonnes in March.
No surprise that the two most favoured export countries were South Korea and Singapore, both of which host LME warehouses. This contra-flow of metal is why net imports fell by a steeper 31 percent to 516,800 tonnes in the first quarter of the year. Buyer resistance to historically high prices is even more apparent in China’s refined tin trade. Net imports plunged by 64 percent to 1,910 tonnes in the first quarter. The shift in the pace of imports dates back to the start of Q4 2010, exactly coinciding with the surge in LME prices to a series of fresh all-time highs.
Which means, all that copper analysts assumed was satisfying Chinese demand has done anything but. If anything, a lot of it has been offloaded straight back to LME warehouses via a simple pit-stop in a Chinese bonded-warehouse (while it was monetised).
Nice.
And it explains why LME stocks have instead been rising.
75% earnings meet or beat expectation is a conspiracy. Matt Miller (one of few in Bloomberg who actually rebuts guests) keeps reminding “strategists” that 75% meet or beat is the historical average, nothing to be extraordinary about.
Emerging market stocks continue to send out technical signals of an imminent major top. If so, I expect the EEM to peak within approximately one month and decline, at a minimum, 30% from current levels.
http://jamesgoodeonthemoney.blogspot.com/2011/04/curse-of-domed-house.html
For obvious reasons a major shorting opportunity may also be close in various commodities, copper being a prime prospect. In the context of fears of a rapidly-approaching property & construction train-wreck in China, it’s worth noting that the weakest-looking market of them all is Shanghai.