The speculative Chinese commodity bubble has begun to reach the mainstream as Citi's warning to "hold on to your hats" today at the surge in trading volumes across Rebar, Iron Ore, Coke, and Copper literally exploded with the former now the most actively trade commodity in the world. The frenzy has become so insane that the head of the largest metals exchange in the world exclaimed at a conference in Singapore today that "I don't think most people who trade it know what it is." We suspect he is 100% correct and judging by the following chart, we know exactly how it will end.
As Bloomberg reports, the head of the world’s largest metals exchange said while volumes in China’s commodity futures markets have become phenomenal, it’s possible some traders don’t even know what it is they are buying or selling.
“Why should steel rebar be one of the world’s most actively-traded futures contracts?” Garry Jones, chief executive officer of the London Metal Exchange, said at a conference in Singapore on Wednesday. “I don’t think most people who trade it know what it is.”
Trading of commodity futures in China from steel reinforcement bars — a benchmark product used in construction — to iron ore, coking coal and cotton has ballooned this month on an unprecedented surge in retail investor interest. The jump in volumes has stunned global markets, according to Morgan Stanley, while eliciting concern from Goldman Sachs Group Inc.
Exchanges in Asia’s top economy including in Shanghai have announced a series of measures this month to cool the frenzy, and said more steps may follow.
“If you look at the client base of most Chinese exchanges, it’s heavily retail-focused,” Jones said on a panel discussion addressing commodities and risk management in China. The exchanges there “have very high retail participation. They have a very high velocity of trading,” he said.
Now where have we seen this pattern of massive speculative volume rushing in from retail investors chasing a trend?
The speculative activities will be vulnerable to a sharp reversal, once the upward price momentum wanes, according to BMI Research, a unit of Fitch Group, drawing parallels with a rally, followed by a slump, in Chinese equities last year.
And that did not end well for price action before in 2015…
or 2009…
And just as expected above…once the volume reaches a crescendo it crashes and The Party's Over
As reports from China suggest both major margin increases at the main exchanges and crackdowns on real production: Tangshan city is banning all coke, steel & cement productions for 24 hours starting this noon.
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