Are You Ready for the Meltdown in Commodities?

The Chinese stock market had an absolutely disastrous start to the year.

On the first trading day of 2016, stocks fell by nearly 7%. The selling pressure triggered a circuit-breaker, which halted trading of Chinese shares for the day.

Not surprisingly, the artificial measure did little to contain the market slide. So, the Chinese government intervened drastically on the second trading day. In the early trading hours, they pumped stock prices nearly 5% higher. Unfortunately for them, global equities barely held up by the end of the trading session.

The nightmare for regulators and punters didn’t stop there.

On Thursday, Chinese stocks tumbled by another 7%. This triggered yet another circuit breaker, halting trading in Chinese stocks for the day.

The Chinese carnage was felt across the globe. Equities and commodities were slammed all last week. Unfortunately, this is just the start.

Chinese worries won’t stop here

Looking at the mayhem in Chinese stocks, check out the chart below. It shows the CSI 300, a benchmark of blue chips in Shanghai and Shenzhen.


Source: Zero Hedge

The volatility recalls last August. Back then, following a surprise devaluation of the yuan, China’s stock market crashed.

Beijing sparked a global rout, wiping out trillions from global equities. As the US stock market corrected by 16.3% from the May high, it forced the US Fed to hold off on raising rates until December.

Since the first rate hike, with the yuan in freefall, the stock market’s been incredibly wobbly. The offshore yuan — which is traded freely — is at five year lows. The onshore yuan, the currency used by those in mainland China, is trading at 2011 level lows.

The question is: are we facing another major stock market correction, or a crash?

In my view, we’re looking at a deeper correction.

On a technical analysis standpoint, the US Dow Jones Industrials Index closed lower last year than in 2014. The Aussie market barely made a dime for punters last year. You couldn’t ask for a more bearish technical signal.

Major stock market correction on the cards

The next stock market correction will be caused by the destruction in commodity prices. This will lead to major defaults and bankruptcies across the board. I told Resource Speculator readers last week ‘we’re facing a Global Financial Crisis in resources early this year’.

In my view, we’ll see one or more of the major commodity producers go bankrupt. Most likely, Glencore PLC [LON:GLEN] or Anglo American [LON:AAL] will be the first to bite the dust. These are two of the largest and most leveraged base metal miners in the world.

After some of the major miners go belly up, we’re likely to see a wave of defaults across the energy space. Most crude operators, especially in the US shale game, can’t survive lower oil prices. According to investmentu.com,

There’s no doubt that 2015 was a roller-coaster ride for oil and gas investors.

Not only has it led to $13 billion in fresh (and expensive) debt, but in the fourth quarter alone nine U.S. oil and gas companies – each with more than $2 billion in debt – filed for bankruptcy. That’s the highest quarterly number of oil and gas bankruptcies since the Great Recession.

Throughout the entire year, 41 oil and gas companies filed for bankruptcy and 70,000 oil jobs were lost. Companies in the oil and gas sector accounted for about 25% of global defaults.

It’s no wonder. The EIA estimates a breakeven price range between $30 and $75 in North American oil plays. At current $35-per-barrel prices, many companies find it difficult to cut costs to maintain production.

The writing is on the wall for commodities this year. As the crash in commodities continues, the Chinese story will get worse. This will see a major correction in stocks in the coming months. While we’re due for a bounce this week, get ready for a 10–15% stock market correction from the start of this year.

There will be better times ahead

Of course, the destruction in the commodities (and stocks) won’t last forever.

As I’ve been warning for nearly two years, the world’s heading towards another major international war. This obviously isn’t something we want. But we should be prepared for the worst — including financially.

Looking at the recent developments in the Middle East, relations between Saudi Arabia and Iran have hit new lows. Following the crash in their spending budgets thanks to lower commodity prices, tensions will get worse before they get better. There’s a good chance that we’ll see a proxy war break out in the Middle East this year.

The question will be if Russia, China and the US will be dragged into it — against each other. Again, war isn’t something I want. It isn’t something I enjoy talking about. But, one fact remains — war is historically ‘good news’ for commodity prices.

Talking about this story, the tensions aren’t currently strong enough to drive a turnaround in commodity prices. Things have to get a lot worse to drive commodity prices higher. For example, a major oil field being bombed or a declaration of war.

The geopolitical events are escalating. But, at the moment, this is still a chess match. It will take time before we see a full on confrontation. As such, commodities are due to crash in the months ahead. Commodities, and stocks, will cling to the deteriorating Chinese story in the short term.

When we see a full on confrontation, commodities will boom. That time hasn’t come yet. But if you want to know the best time to buy commodities, and the best miners digging them up, check out Resource Speculator. If you want to know more on this story, click here.

Regards,

Jason Stevenson

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