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Stocks

Market Scramble: Chinese bubble lurks behind commodities rally

TOKYO -- Though a recent rise in commodities prices has dispelled some of the pessimism permeating Japanese stock markets, a futures bubble in China could leave traders less hungry for risk.

     The Nikkei Stock Average edged down 62 points Wednesday to 17,290, with many market players opting to stand back and await the Bank of Japan's upcoming monetary policy statement. A sales and trading desk head at Nomura Securities chalked up thin trading to a lack of consensus on whether the central bank will announce further easing. Some expect the bank to increase purchases of exchange-traded funds, while others see it deciding against doing more for now.

     Even if the BOJ decides not to act, share prices likely would experience only a limited decline, said Masahiro Ichikawa, senior strategist at Sumitomo Mitsui Asset Management. He cited a strengthening dollar, as well as a commodities rally that has allayed concern about emerging economies.

     Higher commodities prices are shoring up some stocks. Nippon Steel & Sumitomo Metal dipped just 1.3% Wednesday despite reporting a 50% drop in pretax profit for fiscal 2015. Shares of oil companies Showa Shell Sekiyu and TonenGeneral Sekiyu reached year-to-date highs, while Mitsubishi Corp. and other major trading houses rose across the board.

     The Nikkei average correlates closely with commodities prices. The Thomson Reuters CoreCommodity CRB Index has advanced 6% since the end of March. The Nikkei average subindex for marine transportation gained 10% over the same period while the steel subindex climbed 8%, both outpacing the benchmark index's overall 3% rise.

     But the risk-on mindset motivated by the pickup in commodities prices could prove fragile. A bubble seems to be forming in Chinese commodities futures markets.

     The Shanghai Futures Exchange hiked trading fees Monday in a bid to rein in speculation, urging traders to invest rationally. Steel rebar futures markets have turned frothy, with prices soaring 50% from the end of 2015. Turnover swelled roughly sixfold over this period to reach 605.5 billion yuan ($93.2 billion) April 21 -- equivalent to roughly 223.61 million tons of rebar.

     Iron ore futures on the Dalian Commodity Exchange rose by half over the same period. Money generated by easing flowed out of stock markets after last year's rout and into futures markets, a trend that has spread from funds to retail investors, a local commodities futures firm said.

     The surges in rebar and iron ore prices would be no problem if they reflected real demand. But some have expressed unease about this development given that emerging economies are still cooling. "It's driven by speculators," not a tighter supply-demand balance, said Hideyuki Ishiguro, senior strategist at Daiwa Securities.

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