Overnight “news” seems rarely to be good these days.
A bit came across through the night indicating the repo rate in China had spiked to 25% (according to Forbes). In a nutshell, this is an indication of a banking meltdown going down right now in China.
This just a day after the country’s flash PMI report missed expectations and came through at a 9-month low.
Both points are bad for Canada’s resource sector.
An elevated, or record high, repo rate indicates a lack of trust within the Chinese banking sector. A similar phenomenon that hit the U.S. banking system during the financial crisis of 2008/09. If banks are nervous to lend to each other, it spells trouble for the underlying economy. An economy that has driven the demand for commodities. Canada’s commodities.
Taking a drubbing
Teck Resources (TSX:TCK.B) look out. Same for you First Quantum (TSX:FM). You are the producers of that which the Chinese economy has craved. And gold companies, such as Barrick Gold (TSX:ABX) and Goldcorp (TSX:G), you too are in for some near-term pain given these China issues, as well as the Fed’s potential “tapering”.
In general, Chinese banking issues coupled with a change in the Fed’s game-plan does not bode well for those who have benefitted from this double-barreled ride.
With the spot price of gold currently down 3.7% to about $1,300/oz (up from its earlier lows) and copper down almost 2%, it’s likely to be an ugly day on the S&P/TSX Composite. Oil is also down more than 2% thus far.
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Fool contributor Iain Butler is short $26 August 2013 put options on Teck Resources and $32 July 2013 put options on Goldcorp and owns shares of Barrick Gold and Teck Resources. The Motley Fool has no position in any stocks mentioned at this time