When China Sneezes, Mining Interests Catch Cold

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"When macroeconomic data is released, markets waste no time reacting."

Markets reacted quickly this week after Chinese officials announced a drop in oil imports during the month of July. Oil prices immediately headed south, dropping below $80 a barrel after reaching new three-month highs on Monday.

Reliable economic data from the Chinese government is sparse, but when macroeconomic data is released that can easily be verified by outside sources, markets waste no time reacting to the portent of the message given. The Chinese manufacturing engine has been in hyper-growth mode for years, and for those national economies or raw material industries that depend on a vibrant export trade to China, a hiccup in Chinese demand can cause an immediate decline in production efforts across the planet.

Bank of America Merrill Lynch wrote in a recent report to their clients that, "Over the last decade, China went through a massive construction phase, and one of the best ways for investors to play that was through industrial metalsócopper, nickel, zinc and iron ore all did extremely well."

Market prices may have discounted these facts in current prices, but the missing links have more to do with timing and degree of severity.

Some analysts remain optimistic. Commerzbank in Frankfurt noted, "Worries regarding a lasting weakening of demand seem to be premature."

General export data coming out of China remain stellar. However, with economies in the developed world remaining stalled in mid-recovery, the demand side of the equation for Chinese exports would appear to be lacking. Mining and oil imports seem to be the first sectors impacted by China's inevitable pullback.

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