While traders are keeping a close eye on developed markets to see if the risk from from Turkey’s financial crisis or China’s trade war is spreading, the emerging-market contagion has slammed the base metal markets. Hard.
Base metal markets plunged on Wednesday, with most contracts falling more than 2% in London: the broader base metals spot price index was down over 4%, and is now just shy of a bear market.
The components were all ugly: Copper sank 2.3% to 5,903 a metric, the lowest since July 2017 and is set to enter a bear market. Aluminum slumped 2.1% to $2,027 a tone, while palladium plunged 5% and the FTSE 350 Mining Index sank to a four-month low, while Zinc plunged 3.1% and was trading at a two year low of 2,377/ton. Not even gold, the usual safe haven, was spared from the selloff, sliding as low at 1,180, and was down 0.9%.
Putting today's plunge in context, today alone, the six LME base metals have in aggregate dropped more than 25%, and are headed for the biggest collective loss since 2011.
Commodities have been hammered by growing fear that problems in China and Turkey will lead to weaker global economic growth, and eventually hurt demand for raw materials. Losses on Wednesday were triggered by a broad retreat in China as the yuan weakened and recent data showed the economy hit a rough patch. Earlier this week Beijing reported an across the board miss for all key economic categories: industrial output, fixed-asset investment and retail sales.
Amid the slowdown, copper has once again emerged as the true barometer of China's economy, with its price tracking the slide in the offshore yuan almost tick for tick.
Copper prices have also been hit by speculation that the wage talks at the world’s biggest copper mine will end without a strike. BHP Billiton and the union at Escondida agreed to put a new offer to a vote by workers, potentially saving the industry from supply disruptions.
Adding to the bearish sentiment are growing signs that emerging markets are starting to panic over fears that Turkey’s economic crisis will spread: overnight Indonesia’s central bank surprised the market with a "surprise" rate hike of 25bps, its 4th in 3 months, as the country moved to contain volatility and curb a slide in the currency.
As Bloomberg notes, sentiment among traders has also turned sharply negative. According to the latest CFTC data, money managers have a short position of about 83,000 copper futures and options, near an all-time high.
And while mining stocks have slumped, they have not been hit nearly as hard as the underlying metals, and prices certainly aren’t anywhere near the lows hit in the depth of the commodity crisis from the past few years, with the FTSE 350 Mining Index is still more than twice the level from the start of 2015.
Should China's slowdown accelerate, and should trade war with the US escalate, this divergence will not last too long.