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Written by Carolyn Cui and Brian Baskin
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September 01, 2009 12:00 am EDT |
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The Wall Street Journal
Commodities declined broadly, as the overnight dive in China's stock market raised new concerns about the country's slackening appetite for raw materials.
Leading the pullback were crude oil, copper and soybeans, which are more reliant on Chinese consumption, down 3.8%, 4.2% and 3.2%, respectively. The Dow Jones-UBS Commodity Index lost 1.7%.
Monday's drop highlighted worries among investors about the resilience of emerging markets, which have been a driver behind commodities' rally so far this year.
Market participants also have been worried that China's commodities buying spree might have run its course, evidenced by a further slowing in China's August bank lending. A significant portion of China's stimulus package was set aside to stockpile commodities for infrastructure development.
As China slows down the accumulation of stockpiles, commodities are facing some downward pressure. In recent weeks, a leading indicator for trade activities has been sending out alarm: The Baltic Dry Index, which tracks shipping rates for bulk commodities, has tanked 44% since early June.
Many analysts noticed a growing correlation between the Shanghai Composite Index and the crude-oil prices. On Monday, the benchmark index of China's stock market fell by nearly 7%, dragging down energy products across the board. Crude oil closed at $69.96 per barrel at the New York Mercantile Exchange, falling through the psychologically important level of $70.
"For . . . months now you can come in at 7 a.m. in New York and have an idea of what the direction is going to be in the market by what equities did overnight, particularly in Asia," said Addison Armstrong, an analyst with Tradition Energy in Stamford, Conn.
As uncertainties continue to linger, commodities are vulnerable to external market forces such as Asian equities and the dollar.
"There's so much anticipation and sensitivity to relatively small changes in the wind," said Brad Zigler, managing editor at Hard Assets Investor, a commodities research Web site.
The selloff in the Chinese market also prompted a decline in copper, seen as a bellwether of economic health, which pulled back from 11-month highs.
The declines were exacerbated by light trading volumes, as London traders took off for a national bank holiday. Activity is expected to remain thin in the U.S. in the days leading up to the long Labor Day holiday weekend.
The market's fate this week will also hinge on the ability of Chinese stocks to recover, market participants said. U.S. oil inventory data, due out Wednesday from the Department of Energy, also is something of a wild card. Oil stockpiles were roughly flat last week, after unexpectedly plunging by 8.4 million barrels the week before.
Despite the concerns over China, some analysts suggest it is time to examine the developed countries, where economies have shown signs of improving.
Recent positive economic data out of the U.S. will eventually translate into demand for energy and metals, said Hussein Allidina, a commodity strategist with Morgan Stanley. U.S. oil consumption in June was revised up by the Energy Information Administration last Friday.
"It looks we are turning the corner," Mr. Allidina said.
Allen Sykora contributed to this article.
Credit: By Carolyn Cui and Brian Baskin
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