Global News
From Copper to Chinese Stocks to Junk Bonds, Signals Point to a Slowdown
For months it has been all about Europe and the U.S.
Suddenly, investors have reasons to worry about the rest of the world.
Last week, the Dow Jones Industrial Average tumbled 6.4%, its worst week since October 2008, leaving it down nearly 7% for the year. The Standard & Poor’s 500-stock index did nearly as poorly last week and now is down 9.6% this year.
But rather than focus solely on Greek debt, European banks and the U.S economy, many investors have begun to wring their hands about a new set of indicators they say portend a serious slowdown in the world economy.
A tumble in copper prices and falling shares in Shanghai, Hong Kong and Brazil all have a number of investors on edge. Others are focused on a downturn in junk bonds and sudden weakness in shares of steel and mining and companies. Some investors view these markets as leading indicators for broader markets.
“Copper’s going down, Brazil’s going down, China’s going down,” said Michael Aronstein, president of Marketfield Asset Management, which manages more than $1 billion. “People are counting on the far-flung kingdoms to drive growth,” he added. “That’s where the disappointment is going to come.”
Copper’s 22% drop in September has been particularly alarming. Demand for the metal is often viewed as directly reflecting a broad range of economic activity. Copper goes into houses, appliances and vehicles and is exposed to any drops in spending by consumers, corporations and governments. It is sometimes called Dr. Copper by fans because it’s seen as a better prognosticator of the economy than academics with Ph.D.s.
The recent decline is “convincing evidence of a global slowdown of manufacturing activity,” said John Lonski, chief economist at Moody’s Capital Markets Group.
Copper’s troubles also may signal weakness in emerging markets, particularly China, the world’s largest single copper consumer.
A nearly 10% fall in the Shanghai stock market since the end of July, and a 21% drop in Hong Kong’s Hang Seng Index—worse than the 12% fall for the S&P 500 in the same period—underscore how investors are growing worried about growth in that part of the world.
China’s stock market hasn’t always reflected underlying economic activity in the country, so there is only so much investors should read into the falloff in Chinese shares. Still, economists say Chinese growth likely is slowing, as the second-largest global economy continues to downshift. China’s oil demand in August was the lowest monthly level since October of last year, according to a Platts estimate, though it was up 7% in the past year.
The downshift partly comes from a decision by the government to try to shift the economy away from being driven by government-run infrastructure projects, like its high-speed rail system.
But exports also seem to be under pressure, investors say, as growth abroad slips.
“The provincial trade data for the coastal provinces of Guangdong as well as other key export centers in China is ominous,” according to a letter sent to investors last week by William Callanan, who runs a commodity hedge fund operated by Fortress Investment Group. “Many cracks are beginning to appear” in China and other key Asian markets.
The Chinese housing market also seems to be slowing.
A danger for China is that slowing exports lead to weaker bank-deposit growth and tighter credit, a self-reinforcing “negative feedback loop” that could exert further pressure on Chinese growth, Mr. Callanan argues.
To be sure, China might simply be slowing from an unsustainable pace. As for copper, the price decline could merely indicate that it had recently soared too high. Kevin Norrish, managing director for commodities research at Barclays Capital, said the bank’s estimate of Chinese copper consumption in August was the highest in years.
Weakness in copper and in Chinese shares also may indicate that speculators are feeling a pinch, some say. In China, day traders often drive prices of copper and stocks; today those market participants are finding their funding reduced by lenders. Beijing has been tightening its grip on lending to try to keep inflation under wraps.
Still, any slowdown in China likely would hurt global growth, especially in emerging nations such as Brazil, which sell commodities and other products to fast-growing China.
In fact, other markets that had held up well also are showing weakness, suggesting there may be fewer engines of growth than some expected. The Brazilian Ibovespa stock index, for example, tumbled more than 7% last week, worse than the drop for U.S. stocks.
A slide last week in shares of steel, coal and mining companies adds evidence of a global slowdown, because these industries are highly reliant on growth from abroad. Shares of big commodity producers like Freeport McMoRan Copper & Gold, United States Steel, and Arch Coal were down between 20% and 23% last week, and an index of steel producers declined 19%.
At the same time, junk bonds have been under pressure for weeks, a possible sign of trouble for companies laden with debt. Prices on junk bonds are at levels that suggest defaults will amount to about 8% of junk-bond issuers over the next year, analysts say. And junk bonds haven’t had much of a rebound in recent weeks even when stocks managed to rise, troubling some investors.
Kingman Penniman, president of KDP Investment Advisors Inc., a junk-bond research firm, says junk-bond prices are oversold, and that defaults will probably be 2.5% to 3% in the next year. Still, that is up from an expectation of less than 2% just a few weeks ago.
To some investors, the broad range of indicators suggest the global economy has entered a new period, one fraught with danger.
“The world is now in a synchronized slowdown,” says Mohamed A. El-Erian, chief executive of Pacific Investment Management Co., the biggest bondholder in the world.
Mr. El-Erian argues that weaknesses in copper, China and other markets “speak to recognition of the growing contamination of global economic activity by the West’s sovereign-debt and growth crises.”
Write to Gregory Zuckerman at [email protected], Liam Pleven at [email protected] and James T. Areddy at [email protected]
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By: Gregory Zuckerman, Liam Pleven, and James T. Areddy
Source: The Wall Street Journal, Sept. 26, 2011
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