Last night, the People’s Bank of China(Chinese central bank) raised interest rates by another 25 basis points to 3.0 percent. This action by the central bank moved lending rates to 6.06 percent from 5.81 percent. Whenever the China government has increased rates it has caused the commodities markets to deflate. This morning before the opening bell the iShares FTSE/Xinhua China 25 Index ETF (NYSE:FXI) is trading lower by another 0.22 cents to $42.26 a share. The FXI has been very weak since early November 2010 when inflation levels started to be reported at alarming rates.
Most other emerging markets are feeling the pain of high inflation. Many investors agree that the high inflation is being caused by the Federal Reserve Bank’s zero percent interest rate policy, and the $600 billion quantitative easing U.S. Treasury purchases program. Food riots have popped up throughout the world as the poor nations cannot afford food. The bulk of the money that people have in the poor nations is used for food. Recently the chairman of the Federal Reserve Bank stated that he is responsible for higher stock prices, however, he would not accept responsibility for inflation. He would be correct about inflation except for the fact that the U.S. Dollar is the world’s reserve currency. In other words, every commodity is traded in U.S. Dollars. You cannot trade oil, or copper in Thai Baht, or Japanese Yen. It must be traded in U.S. Dollars.
Traders and investors must watch commodities prices today. The increase in the Chinese benchmark interest rate could put pressure on most commodities. This morning spot oil for March delivery is trading lower by 0.92 cents to $86.57. The United States Oil Fund LP ETF (NYSE:USO) is trading lower by 0.35 cents today to $36.31 a share. Other stocks that can be in play today will be Cliffs Natural Resources Inc. (NYSE:CLF), and Southern Copper Corp. (NYSE:SCCO).