Escalating trade tensions and a persistent devaluation of the Chinese stock market — accompanied by a bearish downturn in the Australian stock market — continue to drag the Vaneck Vectors Rare Earth Strategic Metals ETF (NYSEARCA:REMX) lower.
As the trade-war rhetoric between not only the United States and China but also between the United States and Europe, Europe and Great Britain and the United States and multiple emerging-market economies continues to escalate, demand increases for rare-earth metals seem to be stalling — along with a number of other raw materials.
You can see this shift playing out in the trend of the Baltic Dry Index — an index that tracks the cost of shipping dry bulk goods around the world by sea (see Fig. 1).
Fig. 1 — Daily Chart of the Baltic Dry Index (source TradingEconomics.com)
The value of the index tends to fall as demand decreases and, as you can see, the index has been falling since mid-August.
We are also seeing a decline in share valuations in the Chinese and Australian stock markets.
General Decrease in Chinese and Australian Stock Valuations
Traders don’t feel like they can accurately forecast growth rates in this uncertain global economic environment, so many are simply taking profits off the table and reducing their exposure to the market.
While this decline has been visible in the Chinese market for most of 2018, it is a new development in the Australian stock market.
Looking at the daily chart of the X-trackers Harvest CSI 300 China A-Shares ETF (NYSEARCA:ASHR) — you can think of the CSI 300 index as the Chinese equivalent of the S&P 500 index in the United States — in Fig. 2, you can see that Chinese stocks have given up all of their 2017 and early 2018 gains.
Fig. 2 — Daily Chart of X-trackers Harvest CSI 300 China A-Shares ETF (ASHR)
It looks like ASHR has found long-term support at $23.50, but there is no telling how long this might last.
When you couple the incredibly bearish movement Chinese stocks have seen this year with the newly forming bearish movement Australian stocks are seeing, you know it is going to have a bearish impact on REMX.
Looking at the daily chart of the SPDR S&P ASX 200 Fund — you can think of the ASX 200 index as the Australian equivalent of the S&P 500 index in the United States — in Fig. 3, you can see how the index has started to turn lower after posting new multiyear highs in August.
Fig. 3 — Daily Chart of SPDR S&P ASX 200 Fund (STW)
In an investing environment like we are currently seeing in China and Australia, it’s no wonder the daily chart of REMX has dropped down to a support level just above $18 that used to be resistance in mid-2016 and early 2017 (see Fig. 4).
Fig. 4 — Daily Chart of Vaneck Vectors Rare Earth Strategic Metals ETF (REMX)
REMX is being impacted by the Chinese and Australian stock markets because Chinese (yellow) and Australian (orange) rare earth metals stocks account for more than 54% of the holdings in REMX (see Fig. 5).
Fig. 5 — REMX Holdings (source VanEck)
We don’t see this trend changing anytime soon.
Conclusion on the REMX ETF
The bullish narrative on rare-earth stocks we came into 2018 with has been crushed by volatile geo-political trade tensions. Until trade uncertainty decreases, we expect REMX to remain under pressure.
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InvestorPlace advisers John Jagerson and S. Wade Hansen, both Chartered Market Technician (CMT) designees, are co-founders of LearningMarkets.com, as well as the co-editors of Strategic Trader, a trading service designed to help investors build a profitable portfolio that can withstand all market conditions.