Traders and investors are bracing themselves for more volatility in Chinese commodity and financial markets after a week of wild swings.
The rising level of angst follows moves to increase trading margin requirements by China’s three commodity futures exchanges last Friday night as the exchange (at the central government’s prompting) moved against traders they believe to be speculating in iron ore, coal, copper and other products.
Iron ore futures fell more than 12% up to yesterday and the spot price is down 10% as well to around $US72 a tonne. The drops come after iron ore futures reached a 33-month high on Monday. Steel futures in Shanghai dropped more than 3%.
On the Dalian Commodity Exchange, the most actively traded iron-ore futures contract slumped 6.5% at 577 yuan ($US84.18) a tonne, extending Tuesday’s 6% drop after hitting Monday’s high.
But coking-coal futures reversed a 4.8% intraday loss to close up 0.4% at 1,569 yuan a tonne ($US230)
And the Newcastle thermal coal futures price is down 4% over the last week – from $US111.40 to $US106 yesterday (https://www.quandl.com/collections/futures/ice-newcastle-coal-futures).
Fortescue Metals shares fell 3.7% to $5.86 yesterday on the ASX, Rio shares lost 3.4% to $56.94 (The Guinea iron ore bribery story continues to develop) and BHP lost 2.3% to close at $23.98. In London overnight Rio and BHP shares dipped a further 1%.
Even though there was more steady trading in European and US markets, the ASX 200 looks like starting in the red this morning – off around 15 points judging by the overnight futures trading.
But watch the prices of the big miners, they could come back, especially with gold and oil a touch weaker and everyone looking for the resumption of futures trading on the Dalian and Shanghai markets later today.
Even after the falls this week, iron ore and coal both remain well above the lows of earlier in the year (Newcastle thermal coal is still more than double the $US49 a tonne level it was back in April and May. But for the second time this year iron ore prices have retreated sharply once getting to the $US70 a tonne level and they are likely to go on falling for a while yet.
A year ago iron ore was on the way to its most recent low of $US39.60 a tonne in mid-December, 2015, so the current prices are still significantly better for producers and the budget.
But the oomph that appeared late last week in the mad euphoria promoted by mindless ‘winners’ picking by analysts and media commentators from the Donald Trump election win, is now fading.
The Chinese government is making a determined attempt to drive coal prices lower to ease the impact on its huge state owned power generating sector. And iron ore has shown that once a trend sets in, the price follows it – the price fell more than 25% from the April highs above $US70 a tonne this year.
Investors are now starting to worry about the impact of the dramatic sell off in bonds around the world that has the capacity to badly damage the balance sheets of, insurance companies, investment and pension (superannuation) funds and other big investment groups.
If sustained, the estimated $US1.5 trillion in losses in bonds will have to appear somewhere, and it could be very bloody and lot’s of red ink if the holders are forced to mark the value to market.
If bond yields continue rising into early 2017, the quarterly reports in January and February could make very rotten reading for financial stocks.
