How Copper and Real Estate Could Hold the Keys to China’s Stock Market

09 Oct 2024

By Eric Lee, Sales Director, Phillip Nova

Imagine trying to boost a car’s speed by pressing the gas pedal, but the brakes are firmly on too. That’s kind of what had been happening in China’s stock market until last Tuesday, 24^th September 2024.

Rate Cuts: The Gas Pedal

A bit of exciting news hit the market recently—China is slashing interest rates and cutting the banks’ reserve ratio to try to inject some life into its economy. In simpler terms, they’re making it easier and cheaper for businesses and people to borrow money. Historically, this move would have sent the stock market flying. But since 2021, these moves hadn’t work so well. Why? Because of one major roadblock: the real estate sector.

China’s real estate market has been wobbling like a teetering Jenga tower. One of the biggest culprits? Evergrande, a colossal real estate developer, defaulted on its debt, causing a ripple effect throughout the economy. The stock market, especially the China A50, has become more closely tied to property prices than ever before. So, until the real estate sector gets its act together, those rate cuts might not have the same punch.

New Policies: More Pedal, But Brakes Still On

Wait, there’s more! On 24^th September, China introduced a laundry list of policies to further boost its economy. Here are the key points:

Reduced reserve requirements for banks
Cut mortgage interest rates
Lowered down-payments for second home buyers
Encouraged state-owned firms to buy unsold flats

Their goal? Kickstart the economy, and more importantly, jumpstart the stock market. But will these moves be enough to overcome the drag of the real estate market?

Copper: The Market’s Secret Weapon

Now, if you want to go deeper than interest rates and bank policies, here’s a suggestion: keep an eye on copper. Yes, copper. It’s more than just a metal for wiring—it’s the lifeblood of construction and manufacturing. Guess what? China alone consumes 60% of the world’s copper. That’s right, 60%! No copper, no buildings, and no bustling economy.

Because of this, copper prices are often used by the investing community as a proxy for China’s economic health. If copper prices are rising, it’s a sign that China’s industrial activity is picking up—and that’s usually a good sign for the stock market too.

A Technical Approach: Copper and China A50

Let’s go one step further and look at how we can use copper to get an edge in the stock market. By overlaying the price of Comex Copper Futures with the SGX FTSE China A50 Index Futures, traders can apply technical analysis—like spotting trends or price divergences. When copper breaks a resistance level or shows a trend reversal, it might be time to consider a trade in the China A50.

Think of copper as the coffee fuelling the construction workers. No copper? No buildings, no economic growth. And that’s why traders keep a close eye on it—because it’s a real-time indicator of what might happen in the Chinese stock market.

Conclusion:

China’s economy is like a complex puzzle, with many moving pieces. If you want to stay ahead, don’t just focus on government policy. Keep an eye on the real estate sector and the price of copper—these are the clues that can help you anticipate what’s next for the stock/futures market. Will China’s new policies be enough to revive its struggling market? Time (and copper prices) will tell!

Both COMEX Copper Futures and SGX FTSE China A50 Index Futures are available for trading on Phillip Nova 2.0.

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Upcoming Webinar By Eric Lee

Want more insights from Eric Lee, do not miss his upcoming webinar on Tuesday, 29 October 2024 on Institutional Insights: Mastering Singapore Stocks with Smart Money Strategies. In this strategy webinar, Eric will share how we can make use of the information of institutional fund flow to navigate the Singapore stock market. Don’t miss his insights, register here.

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Eric Lee is a Sales Director with Phillip Nova. With expertise in Futures, Forex, Stocks, and Unit Trust, Eric makes an all-rounded advisor. Make informed trading decisions without spending time combing through endless information as Eric readily provides clients with trade alerts and insights via WhatsApp. Over his years of experience, Eric developed systematic strategies in trading and investing. Book a complimentary coaching session below to leverage on his expertise as he imparts his knowledge to enhance your trading journey.

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An Exchange Traded Fund (ETF) is a marketable security that is formed to track nearly anything, ranging from a specific index, sector, commodity, or increasingly, theme. They are most commonly used to track a basket of stocks, and can typically be accessed through the same channels as regular stocks. ETFs are typically separated into passively-managed ETFs that simply mirror the security they are tracking (e.g. the STI), and actively managed ones that attempt to deliver higher returns or specific investment objectives, often with a pre-specified theme in mind (e.g. ARK Invest’s Innovation ETF).

Why should I trade in ETF CFDs?

ETFs have been growing in popularity over the years. 2020 was the best year for ETFs yet, with global equity ETFs seeing more than $1T in inflows within a 12-month period. Using CFDs to gain exposure to ETFs allows for greater capital efficiency because only a portion of the contract value is required as margin to establish a position.
ETFs are particularly popular with investors seeking a relatively hassle-free investing experience, while desiring exposure to a range of specific and relatively understandable securities. Trading ETF CFDs brings greater convenience by eliminating the need for traders to hold multiple currencies in order to access global ETFs.
An investor wanting exposure to the post-pandemic economic recovery could open a position in the well-known SPDR S&P 500 ETF (SPY), which tracks the performance of the S&P 500. Another investor that may be convinced of the future importance of Environmental, Social and Governance concerns (ESG) may find the increasing selection of ESG-themed ETFs that track a basket of high ESG-rating companies to be a good investment, rather than cherry-picking individual equities by hand. ETF CFDs can act as a powerful tool for traders can profit from both directions of the market by taking on long or short positions.

A look at two ETF CFDs we offer:

1) Has the ARKK been sunk?

ARK Innovation ETF (ARKK) ARKK is an actively managed ETF by ARK Invest that invests in a range of companies based on their innovative and industry-disrupting potential. ARKK’s largest holdings are in companies such as Tesla, Square, and Zoom. ARKK is down around -33% from peaking on 12^th Feb and is currently in the red for the year to date as the market experiences a risk-off outflow of funds. Superstar fund manager Cathie Wood has however been consistently doubling down on her bets, buying even more shares in growth stocks that are going through their own tumultuous periods such as DraftKings, Peloton, Teladoc, and Tesla. In her view, ARKK is playing the long game, and remains steadfastly convinced in the long-term prospects of these growth stocks beyond this current bout of volatility. Similarly on outflows, investors are still betting big on ARKK as ARK Invest has only lost about $1.2B in assets this year across all its six funds, compared to seeing an inflow of $15.1B during the same period. Recently, investors have been nervously eyeing ARKK’s basket of tech stocks as their future earnings potential remain vulnerable to erosion through high inflation – the dominant concern of the market in recent weeks. As commodities – the major contributor to the recent heightened inflation fears – drops sharply from record highs, are investor concerns over hyperinflation overblown?

2) Searching for exposure to Asian equities?

iShares MSCI Asia ex Japan ETF (AAXJ) The AAXJ is currently trading -10.6% adrift of all-time highs seen in February, giving up gains in tandem with an Asia-wide equity sell-off at the time. Given that slightly over 40% of the ETF’s holdings are based in China, the ongoing tumult seen in Chinese equities currently have carried over nearly perfectly in the AAXJ, as Chinese investors take a breather after the stellar gains made over the past year. Looking ahead, Asia – and particularly China, is steaming ahead with its economic recovery. China is widely expected to be one of the best-performing major economies this year, providing a major boost to the outlook for corporate earnings. As the rest of Asia and the world gradually opens up their own economies, AAXJ is likely to again benefit from strong Asian outperformance amidst a strengthening trade outlook.

CFD is available for trading on Phillip MetaTrader 5 (MT5).

Features of trading CFD:

Trade in both the bull and the bear markets
The ability to enter a long and/or short position allow traders to take advantage of both rising and falling markets.
Smaller barrier to entry
Flexible and smaller contract sizes. This means that traders will be able to enter into a contract with a modest amount of capital.
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Unlike futures which commonly have a fixed expiration date, CFD allows traders to perpetually hold the position(s). CFD is cash settled, no need to worry about the delivery of the underlying asset.

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