While the world's attention has been focused on a precious metals' slide and a 'dire' 2% correction in stocks, another metal has been sending some ominous signals. So-called Dr. Copper is down 5.5% this week dragging it to negative for the year and highly suggestive (see 2011 and 2012 charts below) of a pending slide in US equities [6].
The reason for stocks to extend their losses, we believe, comes back to the little known fact that China is the marginal inflation center [7] of the world. When global inflation gets too hot, it will tend to hit China first/hardest given its high food-weighting and energy demand; China then, subtley mind you, complains to the Big-5 Central Banks and an implicit tightening occurs - which then fades global stocks as the liquidity pump dries up.
As we noted recently [8], the Chinese never had a strong equity tradition and instead the trillions in deposits ($14 trillion last) is mostly going to fund loans used to buy homes (and marginally away from gold). However, the PBoC is clearly nervous and took matters into their own hands - with the largest liquidity withdrawal [9] (tightening) on record in the last week (net repo redemptions). Perhaps, as we have seen again and again, with liquidity all there is left to create 'growth', Dr. Copper's credentials are worth paying attention to.
Longer-term, Copper vs Gold (perhaps - growth vs fiat) points to a different picture for stocks...
But in the short-term, we have seen this picture of Copper and Chinese stocks leading US equities into a downturn twice before since the 2009 lows... and each time, US equities caught down soon after...
[10]
But the reason appears to be China's clear signal to the world that it won't stand idly by and enable inflation importation - whether for fear of an 'arab spring' like reaction or more simply a bubble-popping need to slow things down... It appears for now, China has taken that latter route with the largest 'net' liquidity withdrawal on record of CNY910bn this week or around USD150bn - as seen in the lower two panes of the chart below...
[11]
It would appear, just as when inflation reared its head last year, tightening has taken place with the massive easing before hand flowing from stocks and gold (blue and yellow in the chart above) at the margin to real estate... last year this marked the bottom in gold as inflation fears sent the marginal Chinese buyer back into the precious metal - and the levels are around the same this time also.
Charts: Bloomberg