db X-Trackers Harvest CSI 300 China A-Shares (ASHR)
ASHR is down 4.4 percent in the past four trading sessions. The latest decline comes as a result of a flurry of bad news. China had a large trade deficit in February with very weak export growth. Credit growth tumbled in February and came in far below analyst forecasts. Most importantly over the short-term, the country’s first onshore bond default occurred on Friday and touched off a plunge in copper prices that has yet to stop.
We have been discussing the risk posed by China for some time, but with greater urgency in 2014 due to the influx of negative news. The drop in copper adds an exclamation point since the move below $3 breaks long-term support. Copper is said to have a Phd in economics because it predicts economic growth and recession. While optimists point out the drop in copper is due to its use as collateral for Chinese loans and distorts the economic signal, this provides little comfort. If credit growth slows in China, demand for copper would fall even without the added risk caused by China’s use of copper in the financial system.
The real optimistic take is to believe copper prices will soon rebound. A move higher will signal that stress in the Chinese financial system is not acute and worries are overblown. If instead copper continues to decline, it will be an indicator of a further decline in global markets.
Global X Copper Miners (COPX)
The stock market ignored the drop in copper on Friday, Monday and Tuesday. This chart of copper miners shows investors’ optimism. It shows mining shares bottoming in July and moving higher in a series of higher lows. That rise is now at risk although COPX would need to break the July low of $8.41, a loss of more than 4.4 percent from Tuesday’s close. If sentiment changes in the market, this chart could also signal a breakdown.
iShares MSCI Brazil (EWZ)
Brazil is a commodity exporter that benefits from Chinese growth. The country had its own issues with credit bubbles, and slower Chinese growth hasn’t helped matters. EWZ peaked in 2011 and the only support below the current price is the 2008 low. The ETF has a near-term bottom around $38 set at the start of February. A loss of 3.6 percent would break that low and invite further selling.
Global X Social Media (SOCL)
In contrast to the weakness in China, commodities and related ETFs, the high fliers of 2013 and 2014 remain in bullish trends. We have seen small sell-offs in biotech and social media, but both are well above their 50-day moving averages and the pullbacks were still minor. These volatile sectors could decline rapidly though, and investors have mainly ignored the risk from China and the signal sent by copper thus far. That looks to change today based on the action in Europe and the U.S. index futures.
Back in January, these ETFs fell along with the market, but not to the degree one might have expected given their volatile nature. Solar held up very well and then went on to strong gains in February. If these shares hold up well again, it will be a good sign that worry about China is overblown and market weakness is short-term.