China plunges, and it may get worse

Published Fri, Nov 27 201511:20 AM ESTUpdated Fri, Nov 27 20152:02 PM EST

A sharp drop in the Chinese stock market Friday is another negative development for the world's second-largest economy, but it may be just the start of another downturn in that nation. The Shanghai composite closed down 5.5 percent, the worst day since the turmoil in August, on news regulators have launched probes into several brokerage firms and Chinese industrial companies' profits fell 4.6 percent in October . This is on top of a recent sell-off in commodity prices and the latest sales numbers from construction machine maker Caterpillar , which portend a further economic slowdown in the Asian country. Here is what Goldman Sachs and a leading Wall Street analyst of Caterpillar said... One of the oldest market adages is how copper has a Ph.D. in economics. Many investors think copper prices are a leading indicator of future economic trends because of the metal's wide use in a variety of sectors including home construction, industrial manufacturing and consumer products. Source: FactSet Goldman Sachs' Max Layton took notice of the double-digit decline in metals prices over the few weeks in a note to clients Nov. 17. "What has also occurred since late October has been an eye-catching rise in Shanghai Futures Exchange open interest across the metals complex — for copper, it has been the largest increase in Shanghai open interest in 12 months," Layton wrote. He added, "Indeed over the past five years, periods of rising Shanghai Futures Exchange open interest and falling metals prices have been associated with concurrent or imminent weakening in China's commodity-intensive old economy." Read More Is Amazon going to cut UPS, FedEx out? Layton cited the statistic that since mid-2011, the Shanghai Futures Exchange open interest indicator has given a correct bearish signal on 4 out of 5 times for upcoming China economic data releases. In addition to the falling commodity prices, companies aren't seeing a turnaround in China business. Caterpillar on Nov. 19 filed the company's latest October sales data . The numbers showed dramatically slowing demand in Asia and North American markets in both the mining and construction sectors. Axiom Capital's Gordon Johnson said, in an email to CNBC, that he believes Caterpillar's numbers speak ill for China and the U.S.: "Caterpillar's October figures suggest the U.S. construction industry is slowing much more than feared. ... Due to China's exporting of its deflation to the rest of the world, and what we think is a glut of Caterpillar inventory, globally at present, we expect U.S. industrial trends to weaken even further through the end of this year, and all of 2016. Pundits who think things have bottomed, or will bottom soon, we believe, will be incorrect." Johnson reiterated his "sell" rating on Caterpillar with a 12-month price target of $28 in a note to clients Nov. 19. Read More Here's what top investor Steve Mandel is buying

China Daily | Reuters

A sharp drop in the Chinese stock market Friday is another negative development for the world's second-largest economy, but it may be just the start of another downturn in that nation.

The Shanghai composite closed down 5.5 percent, the worst day since the turmoil in August, on news regulators have launched probes into several brokerage firms and Chinese industrial companies' profits fell 4.6 percent in October.

This is on top of a recent sell-off in commodity prices and the latest sales numbers from construction machine maker Caterpillar, which portend a further economic slowdown in the Asian country.

Here is what Goldman Sachs and a leading Wall Street analyst of Caterpillar said...