Chart Of The Week: China Slowing, Copper Headwinds

|
Includes: CHN, CN, CPER, CUPM, CXSE, FCA, FLCH, FXI, FXP, GXC, JJCTF, KGRN, MCHI, PGJ, TDF, WCHN, XPP, YANG, YAO, YINN, YXI
by: Topdown Charts

Summary

China's economy is clearly undergoing a cyclical slowdown.

Given China remains the world's most important consumer of copper, it means headwinds are likely to persist for copper.

The open question is when will the slowing become too much and prompt more policy stimulus - turning both China and copper around.

China's economy is clearly under pressure and it shows, whether you look at the limp performance of the Renminbi, plunging Shanghai Composite, softening PMIs, or indeed, the weaker price action in commodities.

The chart of the week comes from a report on the outlook for Copper (and China), where we focused on this particularly important commodity.

The chart shows the copper price against a smoothed composite of the Chinese purchasing managers' surveys.

Specifically, we've got LME spot copper prices on the right hand axis, and the 3-month smoothed average of the NBS manufacturing + non-manufacturing PMIs. Taking a smoothed, combined measure of the PMIs allows for a less noisy and purer signal on the macroeconomic currents in China.

The first thing most people are probably thinking is "why should China matter for copper?" There are a few good reasons; firstly, China is the largest global consumer of copper, accounting for around half of global demand. The other thing is that China's economic cycle is intimately affected by the Chinese property market (which also quite directly reflects policy settings).

Thus, if China's economy is softening, we should expect copper to face headwinds, all else equal. And if China is stimulating its economy, we should eventually see this flow through to stronger copper prices. Aside from the opportunities for trading copper that this presents, it also means that copper serves as a useful cross-check against the economic data pulse in China.

So as China's economy faces pronounced headwinds from the trade war, previous policy tightening, reforms and deleveraging, and softening economic confidence, copper is also therefore likely to face headwinds. And while China has begun to stimulate its economy, e.g., recent RRR cuts, we're yet to see a more forceful stimulus announcement which would turn both of the lines around in this latest chart of the week.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.