Spread bets and CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75.3% of retail investor accounts lose money when trading spread bets and CFDs with this provider. You should consider whether you understand how spread bets and CFDs work, and whether you can afford to take the high risk of losing your money.

CN50USD

Commodities feeling the heat from a slowing China

Chris Weston
Head of Research
20 Aug 2021
If you haven’t been paying attention, commodities are in the doghouse, and short-sellers are owning this space.

Iron ore has been at the heart of the move, with Dalian iron ore futures falling 34% in 25 days. The focus in China to cut back on steel production for environmental reasons has obviously impacted iron ore, as has the reset underway in the property market. We’ve seen other regulatory factors suggesting support for financial assets will be there in the right circumstances, but with over $6b of defaults this year alone, notably in the high yield property credit market, it suggests authorities will not be so quick to step in this time around.

China’s falling credit impulse and liquidity tightness have also been to a red flag, as has Covid trends and we’ve seen the slower numbers resonate in recent industrial production numbers. BHP put out a statement earlier this week, which while holding a positive outlook, eyed near-term risks. BHP, FMG and RIO are stocks that have come up one of my market scans, all having fallen for five straight days – I am not so sure this is wholly unique though, as scanning our total universe of equities (on MT5) I find 101 other names having a similar run of losses, and all of these have a 3-day RSI below 15.

It is rare that BHP falls 6 days though and granted there have been some major changes proposed to its company structure, there have been calls that if this drops on open again, that the mean reversion players will looking closely for short-term longs here.

Personally, I am not sure the volume has really dropped off enough in the recent liquidation to give me a real belief to trade these names from the long side just yet, that is as a mean reversion play – volume has been rising on the down days.

Copper is also one that many are talking about as a sign of the China/global slow down. Having broken the uptrend from early 2020, the 200-day MA is now holding up play and supporting - a break here and momentum could take this to 350. Crude is also well traded here by clients, although the daily chart has put a pinbar reversal in play and a higher high in the new session ahead could see some stability to risk sentiment across markets. If Asia fades the rally we’ve seen through US trade off of $62.65 then a break of these lows and the 200-day MA could play in, currently at $60.55.

20_08_2021_D1.png

With global growth and China’s import demand called into question it's interesting to see the VIX holding 21%. Perhaps that pulls back a touch into the weekend, but we’ll see how the S&P500 reacts into trend support, and the 50-day MA. However, the big story is not so much equity vol, but the moves in the USD. It’s hard to go past the breakout in the greenback, with the DXY moving to the highest levels since November. The USD has rallied on the day vs all major currencies, with an increased focus on USDCNH which has broken back about 6.5000 – do not underestimate how important this cross is right now – but is this the start of a trend higher as international (notably US) investors liquidate Chinese investments, or will we see a repeat of the moves seen in late July where everyone got excited and the pair fell back into the range the next day? Trade the opportunity with Pepperstone.

Ready to trade?

It's quick and easy to get started. Apply in minutes with our simple application process.

The material provided here has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Whilst it is not subject to any prohibition on dealing ahead of the dissemination of investment research we will not seek to take any advantage before providing it to our clients.

Pepperstone doesn’t represent that the material provided here is accurate, current or complete, and therefore shouldn’t be relied upon as such. The information, whether from a third party or not, isn’t to be considered as a recommendation; or an offer to buy or sell; or the solicitation of an offer to buy or sell any security, financial product or instrument; or to participate in any particular trading strategy. It does not take into account readers’ financial situation or investment objectives. We advise any readers of this content to seek their own advice. Without the approval of Pepperstone, reproduction or redistribution of this information isn’t permitted.