Front-month (Dec) copper futures are trading near $200 ($200.15) for the first time since March 2009 as the collapse in the global economic indicator extends to an unprecedented 14th day in a row. The ongoing collapse appears to have finally impacted Chinese equities which have given up the morning's gains and are drifting rapidly lower. Overall, as Goldman warns, the metals market appears to be increasingly pricing concurrent and/or future weakness in China’s old economy.
This is the longest losing streak on record (based on Bloomberg data) and is the worst 14-day loss (down 13.8%) since October 2011...
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With a break of $200 being heavily defended for now...
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However, as Goldman Sachs details, rising SHFE open interest may flag China demand deterioration
Metals prices have declined by 12%-17% since late October. Over this period, China’s economic data for October has disappointed, the US dollar has strengthened on a trade weighted basis, and the broader commodity complex has moved lower, including most notably, energy prices.
What has also occurred since late October has been an eye catching rise in Shanghai Futures Exchange open interest across the metals complex – for copper, it has been the largest increase in Shanghai open interest in 12 months – since the 1Q15 collapse in Chinese metals demand.
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In our view, this development raises a red flag regarding ongoing and near term activity in China’s ‘old economy’ and metals demand growth, as measured by our GS China Metals Consumption Index (see chart below). Indeed, over the past five years, periods of rising SHFE open interest and falling metals prices have been associated with concurrent or imminent weakening in China’s commodity intensive ‘old economy’.
Meanwhile, though LME and Comex net speculative positioning has also declined over the period, it remains well above its August 2015 lows.
Overall, the metals market appears to be increasingly pricing concurrent and/or future weakness in China’s old economy, and related metals demand. To the extent that the metals market positioning predicts ongoing and potential future China growth weakness – since mid-2011 SHFE open interest has given a correct bearish signal on four out of five occasions – the latest metal market developments have bearish implications for China’s upcoming activity data releases and asset classes dependent on this data.
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It appears Chinese stocks have started to recognize this is a problem...
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Charts: Bloomberg
