As we just detailed in great depth, China's credit growth is slowing at just the wrong time - as exemplified by last night's economic malaise and bond market weakness - and tonight we are starting to see it ripple through commodity and stock markets...
As we noted earlier, Chinese bonds are breaking key levels as China's credit impulse begins to weigh...
And tonight we are seeing that deleveraging pressure filter through to equity markets...
And even more so in the industrial commodities...
SO WHAT?
As we concluded earlier, in our discussions with investors over the past several weeks, the response we get to slowing Chinese data is simply… “so what, stocks don’t fall, and China growth will be strong next year”. While, in general, we acknowledge this sentiment is widespread, we notice a number of troubling trends that bear watching (as noted above). In short, to the question posed in the title of this note: “Should Commodity Bulls be Worried”, we believe the answer is yes.
Why should the bulls worry? Well, with economic growth slowing in China, the question is will it continue into 2018, and will it lead to bulk commodity prices deflating? In short, due mainly, we believe, to slower overall credit growth vs. prior bubbles (i.e., 2009, 2013, and 2016), a material slowdown in economic growth or asset values in China’s market is inevitable – barring another massive ramp-up in credit issuance (which doesn’t appear to be “in the cards” near-term) – it’s simply math.