MORNING BID – Copper, China and currencies

March 12, 2014

Markets start on the back foot this morning, with weakness overseas – and particularly in emerging markets – feeding through to a bit of strain on U.S. futures and a bit of flight to quality to the U.S. bond market.

The outlook for China once again comes into play, with the most recent fears being more corporate defaults in the world’s second-largest economy and the way in which copper imports are used in China as collateral to raise funds. So it’s all nicely intertwined here and has had a detrimental effect on both China’s stocks, stocks in various exchanges around the world, and of course the price of copper, which was down 5 percent in Shanghai.

What that’s done is hit the currencies more sensitive to the commodity complex – the Aussie dollar in particular – and the outlook has both worsened for that and commodity prices, while we see improvement in the dollar, Swiss franc and the yen. “Yesterday’s price action warns investors with broad commodity exposure of increased risks of a downside, and a possibly sharp correction is likely,” wrote strategists at Brown Brothers Harriman this morning.

This would also seem to undercut demand from commodity-sensitive economies of which China, to some extent, is one, but U.S. strategists still see a favorable outlook for the capital spending trend among big companies. Indeed, both Bank of America and Citigroup have noted, of late, how capex has been stronger than expected and spending plans are looking favorable right now.

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