Hang Seng's Collapse And Commodities
Chris Vermeulen | May 24, 2019 12:17PM ET
The Chinese Hang Seng Index collapsed early this week to new recent lows. This breakdown in China's major stock index highlights the anticipated fallout from the continued U.S./China trade war. Recent data from the Chinese property market and corporate bond markets suggest a broad slowdown in economic activity, which may surprise many foreign investors in the weeks/months to come.
Partner this continued economic weakness with the EU Elections and continued U.S./China trade issues and we almost have a perfect storm for commodities such as oil, copper and other industrial/transportation related shares. If the trade continues to collapse between the U.S./China while elections cause the general populations to “pause” traditional spending habits, it would suggest that we could see a continued breakdown in general commodity levels over the next 6-12+ months.
First, the Hang Seng index collapsed lower this week, prompting the U.S. and UK markets to breakdown as well. The continued rhetoric between the U.S. and China regarding the trade war is not helping the global economy. At this point, it's like watching an old-school game of "chicken” – who flinches first.
Tthe German DAX also collapsed. It is obvious that enormous tensions persist within the EU with the elections hitting now and over the next few days. The broader concern for traders is, “do you believe the EU will be able to pick up the slack of the U.S. trade war with China?” If you honestly believe the EU and other foreign nations will be willing to pick up $400B+ USD of trade immediately, we suggest you grab a cup of coffee and watch what happens over the next few weeks with the EU elections, global markets and economic data. We don’t think the EU is capable of taking on another half-trillion USD in trade debt annually right now, or ever, for that matter.
The U.S. Dow Jones, even though it has shown some weakness recently, has still held up quite well. We believe the capital shift, where foreign capital has been rushing into the U.S. economy over the past 4+ years, is continuing to provide pricing support for the U.S. stock market and economy. As long as this continues, we’ll see strength in the U,S. stock market and US assets (such as the USD, Real Estate and debt).
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Commodities, on the other hand, appear to be under severe pricing pressure. We recently authored a series of research posts regarding oil, gold and other commodities. We believe the global commodity index could continue to fall further, as elections and global trade issues continue to exert pricing pressures on global commodities and trade. We think that oil could fall back to levels below $50 ppb and that gold an silver are already 20%-30% undervalued. One does not need to be hit on the head to understand that U.S. elections, the trade war and all the other issues currently executing across the planet may create a perfect storm for certain commodities and global stock-market sectors driving prices much lower before they get any better.
If the Commodity Index breaks the current support level, we could see a much broader breakdown in the global stock market – oil, copper, trade and many other global trade-related issues (retail, housing, corporate debt and others). Pay attention because this is going to get very interesting over the next 4~6+ months.
Lots of great price action to take advantage of.
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