This week, the prices of many commodities have gone up. Oil, silver, and copper are some of the most recent examples. This is because of China’s stimulus measures, but traders should be cautious about the sector’s future until they see proof that the world economy is getting better.
Stephen Innes, managing partner at SPI Asset Management, told MarketWatch, “This latest move from China has lit a fire under investors and given them a much-needed spring in their step.” “It is clear that China’s leaders are doing everything they can to fight deflation in order to boost growth.”
But it’s “still anyone’s guess” if the moves will work in the long run, he said. But in the short term, “it’s undeniable—Chinese stocks are devouring these stimulus efforts like a buffet.”
Pan Gongsheng, governor of the People’s Bank of China, told the public on Tuesday that the short-term interest rate would be lowered and banks would not have to hold as much capital in reserve. This was part of China’s government’s plan to boost economic growth toward its 5% annual goal. He also said that the home market and the stock market would get help.
In a note from Tuesday, Evercore ISI strategists Krishna Guha and Marco Casiraghi said that the PBOC’s plan to ease regulations is “unusually aggressive and comprehensive.” “It is a welcome, if late, response to the alarming sign sent by the drop in Chinese bond yields and the weakness in stocks earlier this month.”
The “range of measures” that the planners wrote about are what stand out from the point of view of the central bank. These include steps to support real estate demand and let non-bank investors directly access central bank loans against collateral. That shows “how serious and complicated the cyclical, structural, and balance sheet problems are that China is facing, along with the fact that monetary policy can’t be effectively transmitted.”
The commodity market went down over the summer because people were worried that China’s growth would slow down and that growth would slow down in both Europe and the U.S., according to Roland Morris, who is in charge of the active Natural Resource Equity Strategy by VanEck.
Recently, things have changed for the better because the U.S. dollar is falling and the Federal Reserve cut rates more than expected last week, he said.
Last week, the U.S. central bank cut its policy interest rate by 50 basis points. This was a bigger move than many economists thought it would be.
The boost news from China on Tuesday, on the other hand, “takes away another headwind for commodities,” Morris said.
Market go up
China’s stock market went up the most in more than two years on Tuesday. Prices of many industrial goods also went up after China made its statement.
“After months of rumors, Chinese policymakers have finally answered with a new set of monetary easing measures that have the markets buzzing,” said Innes of SPI Asset Management. Along with the Federal Reserve’s recent big rate cut, it’s adding fuel to the fire of deflation, which is good for commodities, stocks, and currencies that move with the economy. “The rising tide is pulling all boats up.”
FactSet figures show that the Bloomberg Commodity Index BCOM -0.04% was up 1.2% at 100.23, the first time it had been above 100 since the middle of July. Strong gains were seen in commodities that are sensitive to the economy.
Data from Dow Jones Market Data shows that December silver SIZ24 -0.94% SI00 -0.94% rose 4.3% to settle at $32.43 an ounce on Comex. This was the most active contract finish since December 2012 and it was also the highest. December copper prices HGZ24 -0.03% HG00 -0.03% went up 3.3% to $4.49 a pound. This was the biggest daily rise since May.
It was another record-high closing for gold futures GC00 0.31% GCZ24 0.31%, with the December contract worth $2,677 an ounce.
Oil futures also went up on Tuesday after going down the previous two days.
It went up $1.19, or 1.7%, to end at $71.56 a barrel on the New York Mercantile Exchange for November West Texas Intermediate crude CL.1 -2.56% CLX24 -2.56%. It was up $1.27, or 1.7%, at $75.17 a barrel on the ICE Futures Europe exchange for November Brent crude BRN00 0.11% BRNX24 0.08%.
Morris from VanEck said that traders should buy more commodities right now, and that industrial metals are likely to be the best area to do so.
“China’s stimulus, U.S. rate cuts, and a falling dollar should be good for all commodity sectors,” he said. However, traders should be careful because there is a chance that the global economic downturn could get worse.
Morris said, “I’m not sure we are out of the woods” when it comes to the world economy not having a hard crash.
Geopolitical risks in the Middle East are the most important thing he sees that will move the commodity market in the short run.
He said that in the long run, geopolitical conflicts, de-globalization, and the transition to clean energy are all risks to the supply of commodities. “The default economic policy will be higher inflation because the West’s debt and deficits are big and growing.”
Not enough evidence
Analysts say that before a rise in global stocks or commodities becomes stable, the markets will need to see proof that stimulus measures are working.
“Every time the People’s Bank of China pulls out a surprise stimulus plan, it’s like popping champagne for a spike in stocks and commodities during the day,” said Innes of SPI Asset Management.
“But before we get too excited, let’s remember that putting water on a horse doesn’t mean it will drink,” he said, adding that “this year we’ve seen property support measures thrown around like confetti, and they haven’t even slowed the downward spiral.”
“The PBoC’s latest tricks are good, but it still feels like we’re waiting for the main event….A stimulus check à la U.S. COVID relief might be the real magic wand we’re all waiting for.”
Stephen Innnes, SPI Asset Management
For this rally in commodities and equities to hold, “both the U.S. and China need to get their acts together,” he said.
“We need a soft landing stateside and a full-on housing revival in China,” Innes said. “If the stars align, then buckle up — because we’ll be back in a full-blown bullish commodity cycle.”
