Gone are the days when major events beyond our borders occur in isolation.
Now, every political and natural calamity sends out a destructive ripple that reaches all corners of the commodities market.
Hong Kong’s Umbrella Revolution is no exception.
Since the start of the demonstrations – protesting China’s new requirement of allowing only candidates approved by a nominating committee to run for office as Hong Kong’s chief executive – the world has been uncertain as to what the effects will be.
Global markets have been trending lower as protesters bring Hong Kong to an economic halt.
If the situation escalates, the impact on the market could be catastrophic.
Here’s an in-depth look at the possible outcomes.
Global Markets Under Threat
Just over a week ago, only days before the start of Golden Week, a Chinese national holiday, downtown Hong Kong turned into a battlefield of tear gas and seething crowds.
What started as a student-led protest has grown into tens of thousands of demonstrators.
And they don’t appear to be dispersing anytime soon.
Many commentators see little hope for a compromise between the citizens of the island city and the Chinese Communist Party.
So what does this mean for the commodities markets and the global economy overall?
Well, China’s voracious appetite for raw materials over the last decade has resulted in its position as the leading net importer of many global commodities.
Just look at the growth in China’s commodity imports over the last few years:
The protests not only threaten to tarnish Hong Kong’s reputation as a safe enclave for commerce, but also set the stage for prolonged economic weakness due to a slowing economy.
Should protests in Hong Kong escalate and trickle into mainland China, the disruption to the markets could be severe.
This comes at a time when China’s gross domestic product is no longer growing by double digits, like it did before the financial crisis.
Today, 7.5% is a more likely growth projection, and it’s questionable if the country will be able to maintain even that rate.
In order to predict what areas of the commodities market will be affected, we need to look at what China is importing and from whom.
Crude oil is China’s major energy source and its biggest import, followed by iron ore, which is a key commodity for the country’s infrastructure and real estate industries. The chart below shows how all China’s imports stack up.
On the provider side, Japan, South Korea, and the United States are the largest importers from China. You can see the rest of the primary countries in the chart below.
No one knows what the social outcome of the Umbrella Revolution will be. But the negative ramifications on the commodities markets are evident.
Plus, this event and others like it are exacerbating the already-poor sentiment surrounding growing geopolitical risks and waning consumer confidence.
Investors need to stay informed and plan ahead.
Preparing for the Worst
The bottom line is caution.
This is a serious macroeconomic event affecting global trade, particularly as it relates to China’s largest trade partners.
Whether you’re holding the debt, the equity, or the currency of China’s leading trade partners, the risk premia across the board are heightened.
On a more micro level, the underlying commodities and the companies that produce them will likely suffer, as well.
And finally – in a worst-case scenario – a contagion effect could ripple through to both emerging and developed markets.
While a severe infection is unlikely, it always pays to play on the safe side in times of geopolitical uncertainty – sticking with more conservative trades until the true nature of the situation becomes clear.