Bernanke, Chinese Data to Weigh on Commodities
NEW YORK ( TheStreet) -- Commodities are giving back some of the gains made early in the month.
The catalysts are the congressional testimony from Federal Reserve Chairman Ben Bernanke suggesting potential reductions in quantitative easing stimulus, and weak manufacturing data out of China indicating declining demand for fuel and metals.
Most of the commodities losses have been seen in oil and copper, but the weakness has been widespread. The Standard and Poor's GSCI Index (which catalogs 24 commodities) has shown weekly declines of more than 1% after the data and commentaries were made public.
These moves are not entirely surprising. Copper is generally viewed as a key indicator of economic activity because of its substantial uses in construction projects.
China is the world's largest consumer of copper, and the country's most recent manufacturing data showed contraction for the first time in seven months. This, in conjunction with the possibility of tighter monetary policy in the U.S., creates a greater likelihood we will see declining demand for raw materials into the beginning of next year.
Chinese DataPreliminary readings in the HSBC Purchasing Managers' Index showed that manufacturing activity in China contracted for the month, falling below the survey's 50 line, which signals expansion. The report for May showed a result of 49.6, down slightly from the already weak April reading of 50.4. This follows the U.S. manufacturing purchasing managers' index, which dropped to a seven-month low of 51.9 for May, following a 52.1 reading for April. Globally, the broad trajectory toward weakness here is clear, and commodities markets are set to head lower in response. In addition to its substantial metals imports, China is also the world's second biggest consumer of oil.
This month's contraction in manufacturing activity signals that a major trend change might be in place, and this limits the prospects for construction building in Asia's developing city centers. The sector acts as the main driver of economic activity, so it is not surprising to see that declining manufacturing figures have contributed negatively to GDP growth in China. Chinese GDP dropped to 7.7% for the first quarter, slowing slightly from the 7.8% rate that was seen for all of 2012 (the weakest yearly pace in 13 years).
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