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 amrith.ramkumar@wsj.com and David
Hodari at David.Hodari@dowjones.com
(END) Dow Jones Newswires
July 11, 2018 18:24 ET (22:24 GMT)
Copyright (c) 2018 Dow Jones & Company, Inc.