By Amrith Ramkumar and David Hodari
A selloff in industrial metals and other commodities intensified Wednesday, as the latest tariff threats from China and the U.S. escalated worries about the effect of a trade battle on the global economy.
Copper tumbled as much as 4% to its lowest level in nearly a year, before closing down 3.4%. Futures prices for the red metal have tumbled 17% from a four-year high in June, bringing it close to a bear market.
The trade tensions pounded other materials: Zinc, tin and lead fell at least 2%. The slump extended to almost all corners of the commodity market, with materials from oil to cotton also getting hit. China is the world's biggest commodity consumer and accounts for roughly half the demand of many metals like copper, so concerns over its economy can swing materials prices.
U.S. crude plummeted 5%, its largest one-day drop since June 2017. The move was largely driven by Libya indicating it would resume export activities at its eastern ports, which eased fears of a global supply shortage. But data also showed a larger-than-expected weekly drop in U.S. inventories, and oil futures still sank -- a sign of investor skittishness in the commodities market.
Investors fear a far-reaching trade fight could slow commerce, which would weaken more economies that consume large amounts of materials. Other assets closely tied to growth, like emerging markets, have also struggled. It is a sharp reversal from 2017, when synchronized global growth propelled prices of raw materials and emerging markets.
Because they get used in everything from construction to smartphones, commodities are often used by money managers as a bellwether for global growth. While robust U.S. economic and earnings expansion have kept stocks from tumbling, some analysts have become uneasy that the volatility in commodities signals future turbulence in other markets.
"It's one of those red flashing signals we need to pay attention to," said Kristina Hooper, chief global market strategist at Invesco. "Investors should probably be more concerned than they are because typically Dr. Copper is a very good predictor of where the global economy is going."
On Tuesday, the White House said it would assess slapping fresh 10% tariffs on $200 billion in Chinese goods. China has threatened to match U.S. tariffs with its own countermeasures.
The recent downturn in metals prices is reigniting fears that a Chinese economic slowdown could spread. Similar anxieties sent stocks around the world tumbling in late 2015 and early 2016, with copper slumping below $2 a pound. On Wednesday, copper traded below $2.75 for the first time in nearly a year.
Some analysts expect China to suffer more than the U.S. if the trade fight escalates. Recent data showing weakness in the nation's economy have added to these worries: Growth in China's manufacturing sector slowed in June from the previous month.
Analysts are concerned that tariffs will hurt consumer buying, particularly of products where heavy metals are a major ingredient, like cars and air conditioners.
Air conditioners are "a real growth area for the Chinese copper market," said Oliver Nugent, a commodities strategist at ING. They "account for about 25% of demand in the country."
China has also become a major trading hub for metals, with traders saying that activity there can dictate investor sentiment later in the day in London and the U.S. Lately, selling by Chinese traders has pushed others to also head for the exits.
"We've seen [the Shanghai Futures Exchange] selling in free fall, and that's spilled over into [London Metal Exchange] futures," said Kash Kamal, an associate at BMO Capital Markets. "It's hard to see how this scenario can be de-escalated."
Some analysts think the metals market could rebound if Chinese economic data improve and compromises on trade calm investors. Copper and other metals also struggled for momentum last summer before surging in the fall alongside other risky assets.
In one potentially optimistic sign, speculators have eased off copper. Hedge funds and other speculative investors have cut net bets on higher copper prices for three straight weeks, leaving the market in a less vulnerable state, Commodity Futures Trading Commission data show.
One worry is that the rout could spread to bigger commodity markets like oil. Some investors trade resources like oil and copper in a single basket.
Agricultural commodities have already come under pressure, with some like soybeans already directly affected by the tariffs between Washington and Beijing. Other soft commodities like coffee and sugar have also slid.
The rising dollar adds another alarming sign for commodity investors. Economic momentum has shifted to the U.S., sending the dollar to its highest level in a year. A stronger dollar makes commodities more expensive for overseas buyers. On Wednesday, the WSJ Dollar Index added 0.8%.
"You've got a lot of selling pressure building on itself," said Darius Tabatabai, a portfolio manager at Arion Investment Management. "When we get a move like this, it can accelerate in the short term."
Write to Amrith Ramkumar at email@example.com and David Hodari at David.Hodari@dowjones.com
(END) Dow Jones Newswires
July 11, 2018 18:24 ET (22:24 GMT)
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