But our woes as commodities-stock investors and speculators began in September. Late that month a brutal one-two punch bludgeoned the CCI to new lows, crushing sentiment. First the Fed failed to launch QE3 as some traders expected, igniting one of the periodic QE3 scares. Then overnight heading into the next morning, a preliminary private report claimed China’s manufacturing activity was slowing.
The result was a mind-boggling 4.2% plunge in the CCI, its biggest down day since October 2008 in the dark heart of the stock panic. If such a selloff had happened at higher levels, it wouldn’t have been as devastating. But erupting near lows it just shattered the CCI’s lower support. So futures traders, spooked by China fears, dumped commodities with reckless abandon. Sadly, this wasn’t even remotely justified.
China’s growth was not stalling as feared, later on its actual official 2011 GDP growth came in at 9.2%! But from that point on, nervous Western traders started using China as an excuse to sell. Even though the difference between 7%, 8%, and 9% growth is pretty trivial relative to China’s massive aggregate commodities demand, any hint of China slowing sparked fear. Ironically China’s growth rate should be slowing, as the larger its economy gets the harder it is to continue growing fast off higher bases!
In October and November both commodities and the Shanghai Comp continued to rally and retreat with the world-leading SPX. Normally commodities follow the SPX higher in its major uplegs, as rallying stock markets lead to expectations for an improving US economy which implies higher commodities demand. But oddly in December, the CCI started to decouple from the SPX. It followed the SSEC lower.
More minor data points that should have been inconsequential drove this late-2011 plunge. For example, early in December China reported its industrial output “only” growing 12.4% year-over-year in November compared to 13.2% in October. Unfortunately with traders already worried about China, the CCI ground down to new correction lows on this news. China psychology was heavily influencing US commodities sentiment.
But with commodities so unbelievably oversold by mid-December, most of the weak hands were already shaken out so mostly buyers remained. Thus the CCI finally started rallying with the SPX as it usually does and ought to. Chinese stocks bottomed a little later in early January, when they started to join the global rally too. Once again these interrelationships worked as they should, with the SPX leading the way.
But unfortunately in early March, both the CCI and SSEC started their vexing divergences away from the SPX’s strong upleg. One immediate catalyst was China’s Premier Wen Jiabao cutting its 2012 economic-growth target to an 8-year low of “just” 7.5%. Personally I didn’t take this too seriously. 7.5% growth for the world’s second-largest economy remains amazing in an absolute sense, what an achievement!
And exactly a year earlier this same guy had predicted that China would only grow by 8.0% in 2011, which sparked a commodities selloff. But the actual at the end of last year came in at 9.2%. Like any shrewd manager, the Premier was just lowballing expectations and setting a nice easy target to beat so he could look like a great leader. Nevertheless, the CCI still plunged 1.7% that day.
And as March wore on the selling gathered momentum and snowballed, in both the CCI and SSEC. This was crazy given the strong rally in the SPX that month. The divergence truly made no sense at all fundamentally, it was purely psychological. And even these fears’ foundation was flimsy at best. Since when is the stellar 8.1% annual growth rate China achieved in Q1 a slowdown? Talk about silly.
The Shanghai Comp finally managed to bounce in late March, and has been rallying sharply since despite a sizable pullback in the US stock markets in much of April. Unfortunately commodities didn’t turn north with the SSEC, probably a reflection of the dismal sentiment due to the recent divergence. Selloffs often take on a life of their own until everyone susceptible to being scared into selling anytime soon has already sold.
Not only are commodities lagging wildly behind the SPX, but so are the Chinese stocks. The US economy is struggling to hit 3% GDP growth, China’s is over 8%, yet the US stocks are thriving while China’s remain down in the dumps? This is really illogical and certainly not sustainable. The huge divergence between the SSEC and the SPX that has opened up since December can’t last.
And when China’s stock markets start surging to catch up with the big US upleg, I suspect Western traders’ perceptions of a slowing Chinese economy will vanish. The fortunes of local stock markets all over the world heavily influence how domestic and foreign traders alike view their respective economies. As the SSEC’s overdue rally closes the gap with the SPX, China’s commodities headwind should shift to a fierce tailwind given how oversold and ripe for a major rally the CCI is these days.
The gap between the post-correction performance in the SSEC and SPX above is really big, but that short-term chart doesn’t even begin to tell the whole story. So I made a second one, this time indexed to the SPX’s major bear low in March 2009. Unbelievably, China’s flagship stock index had actually retreated near panic levels earlier this year! This has huge commodities implications.
While the American stock markets have enjoyed a powerful cyclical bull since the stock panic, the Chinese ones have actually been mired in a cyclical bear! After an initial massive surge in early 2009 that saw the SSEC nearly double, it has been grinding inexorably lower ever since. The net result was by January 2012 this flagship Chinese stock index was back trading at March 2009 levels.
Next page: The growth enigma