China PMI Disappoints and Drags Commodities Lower

Today marked a new chapter for polling company Markit’s Chinese purchasing managers index (PMI) as it is now sponsored by Chinese business news company Caixin. The PMI data out of China disappointed with a 48.2 reading, lower than the 49.8 forecasted. A reading below 50 is seen as contraction. It is one of the lowest indicators of the manufacturing industry since the revision to the May survey in 2014. Weaker exports and stock market uncertainty have eroded the confidence of purchasing managers. Asian stock markets were quick to react dropping after the PMI report was published.

Commodities were the hardest sector to be hit by the news of a further slowdown in China. Oversupply and lower demand are keeping Oil prices under pressure. Metals have seen lower demand and little inflation lower the demand as a hedge. The Greek debt deal agreement defused the drama that had reignited the appetite for Gold as a safe haven. Corn and Wheat lost over 6 percent during the week with Oil, Copper and Gold in the 4 percent range. Natural gas seemed to the be one of the least affected commodities during the rout as it only lost 1.89 percent during the week.

Next week’s FOMC statement could keep pressure on commodities as the USD could get a boost from a hawkish stance. Oversupply and lower demand are common themes in the commodities market and there will be little next week to change that outlook. The USD strength or weakness is the main factor that could change the overall valuations until global growth is back on track.

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