China stimulus plans spark a commodities rally, but a soft landing still isn't a sure bet

By Myra P. Saefong

A soft U.S. economic landing and China housing revival could lead to a 'full-blown bullish commodity cycle'

Commodity prices have climbed this week, with oil, silver, and copper among the more recent standouts, buoyed by China's stimulus measures, but traders should be wary about the outlook for the sector until they see evidence that the global economy is improving.

"This latest move from China has lit a fire under investors, giving them a much-needed jolt of confidence," Stephen Innes, managing partner at SPI Asset Management, told MarketWatch. "It's clear that China's policymakers are throwing everything they've got at deflation to jumpstart growth."

Whether the moves will see long-term success, however, is "still anyone's guess," he said but in the short term, "it's undeniable - Chinese stocks are devouring these stimulus efforts like a buffet."

See: China stock-market jump may be 'tradable rally' - but approach with caution

On Tuesday, Pan Gongsheng, governor of the People's Bank of China, said in a public briefing that a short-term interest rate would be cut and the amount of capital banks were required to hold in reserve would be reduced, as China's government moved to lift economic growth toward its 5% annual target. He also said there would be support for the housing sector and equity market.

The easing package from the PBOC is "unusually aggressive and comprehensive," wrote strategists Krishna Guha and Marco Casiraghi, at Evercore ISI, in a note dated Tuesday. "It is a welcome, if late, response to the alarming signal from the prior slump in Chinese bond yields and weakness in equities."

From a central bank perspective, what stands out is the "range of measures," including measures to support real estate demand and allow non-bank investors to directly access central bank finance against collateral, the strategists wrote. That indicates the "seriousness and complexity of the cyclical, structural and balance sheet challenges facing China, plus limitations on the effective transmission of monetary policy."

Commodity market had declined over the summer because of fears around slow growth in China and fears of slowing growth in both Europe and the U.S., said Roland Morris, commodities strategist for the active Natural Resource Equity Strategy at VanEck.

More recently commodities have turned around because of the falling U.S. dollar and most recently the U.S. Federal Reserve's larger-than-expected rate cut last week, he said.

The U.S. central bank last week announced a 50-basis-point cut in its policy interest rate, which was more aggressive that many economists expected.

Tuesday's stimulus news out of China, meanwhile, "removes another headwind for commodities," said Morris.

Market rally

On Tuesday, China's stock market climbed by the most in more than two years and prices of many industrial commodities climbed in the wake of China's announcement.

"Chinese policymakers have finally answered the month-long whispers, delivering a fresh batch of monetary easing measures that have the markets humming," said SPI Asset Management's Innes. "Coupled with the Fed's recent jumbo rate cut, it's adding fuel to the reflationary bonfire, lifting commodities, equities, and pro-cyclical currencies. It's a rising tide that's lifting all boats."

The Bloomberg Commodity Index XX:BCOM was up 1.2% at 100.23, topping 100 for the first time since mid-July, FactSet data show, with economically-sensitive commodities showing strong gains.

On Comex, December silver (SIZ24) (SI00) rose 4.3% to settle at $32.43 an ounce - the highest most-active contract finish since December 2012, according to Dow Jones Market Data. Copper for December delivery (HGZ24) (HG00) climbed 3.3% to settle at $4.49 a pound, posting the strongest daily rise since May.

Read: Silver has been outperforming gold this year - and may rise to its own record highs

Gold futures (GC00) (GCZ24), meanwhile, marked another record-high settlement, with the December contract at $2,677 an ounce.

Read: Gold's record rally gets added jolt from Fed rate cut. Is there anyone left to buy?

Oil futures also rose Tuesday after posting back-to-back declines.

U.S. benchmark West Texas Intermediate crude for November delivery (CL.1) (CLX24) up $1.19, or 1.7%, to end at $71.56 a barrel on the New York Mercantile Exchange and global benchmark November Brent crude (BRN00) (BRNX24) up $1.27, or 1.7%, at $75.17 a barrel on the ICE Futures Europe exchange.

VanEck's Morris said that now is the time for traders to add to commodity exposure, with industrial metals likely to be the best sector.

"China stimulus, U.S. rate cuts, and a declining dollar should be bullish for all commodity sectors," he said, but there are reasons for traders to be cautious, given the risk of a more severe global economic downturn.

"I am not sure we are out of the woods" in terms of the global economy avoiding a hard landing, said Morris.

Near term, he sees geopolitical risks in the Middle East as the most important market-moving factor for commodities.

Longer term, de-globalization, energy transition, and geopolitical conflicts are all risks to commodity supply, he said. "Large and growing Western debt and deficits will make excepting higher inflation the default economic policy."

Lacking evidence

The markets, meanwhile, will need to see evidence that stimulus measures are working before a rally takes a solid hold for global equities or commodities, analysts said.

"Every time the People's Bank of China pulls another surprise stimulus bunny out of the hat, it's like uncorking champagne for an intraday rally in stocks and commodities," said SPI Asset Management 's Innes.

"But before we break out the party hats, let's not forget - leading the horse to water doesn't guarantee it's going to drink," he said, pointing out that "we've seen property support measures thrown left and right this year, and they've barely made a dent in 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."

-Myra P. Saefong

This content was created by MarketWatch, which is operated by Dow Jones & Co. MarketWatch is published independently from Dow Jones Newswires and The Wall Street Journal.

(END) Dow Jones Newswires

09-25-24 0717ET

Copyright (c) 2024 Dow Jones & Company, Inc.