Risk sentiment boosted by China stimulus measures
Daniel Hynes
Senior Commodity Strategist | helping investors and companies navigate macro, political, economic & environmental issues
Highlights
A large stimulus package in China boosted sentiment across the commodity sector. The gains were aided by rising geopolitical risks
Prices and commentary accurate as of 07:00 Sydney/05:00 Singapore/17:00(-1d) New York/22:00(-1d) London.
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Market Commentary
Industrial metals rallied as China announced measures to boost economic growth. The PBoC Governor Pan Gongsheng unveiled a broad package of monetary stimulus measures, including a 50bp cut to the reserve ratio requirement and the seven-day reserve repurchase rate lowered to 1.5%. More importantly for commodities, Beijing targeted the real estate market by reducing the minimum down payment ratio to 15% for second-home buyers, from 25%. The central bank also said it would cover 100% of loans for local governments to buy unsold homes with cheap funding, up from 60%. This effectively positions the PBoC as a lender of last resort. Copper led the base metal sector higher as the market welcomed the effects to boost growth. China, the world’s biggest consumer of metals, has been a constant source of bad news for the market this year. This comes after the US Federal Reserve began its easing cycle with a 50bp cut to interest rates and signalled further reductions at meetings this year.
Iron ore futures rallied on hopes the measures to support the real estate market turn around its fortunes. The efforts to reduce inventories in the property sector should accelerate inventory reduction and shorten the time for excess supply. However, we have some doubt that gains will stick. While they should stop conditions in the steel market getting worse, they are unlikely to provide any boost to demand in the short term. This year’s steel output remains on track to come in lower than 2023. On the supply side, we are also seeing higher output from major exporters as they overcome recent supply side issues.
Gold reached another all-time high as weak consumer confidence data bolstered the case for further deep cuts to interest rates. An unexpected fall in US consumer confidence saw swaps traders increase their bets on another 50bp cut this year. A weaker USD along with lower US Treasury yields also boosted investor demand.
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The package of measures to lift China’s economy also boosted sentiment in the crude oil market. The impact of its flagging economy on demand has been a concern for markets this year. We reduced our forecast for growth in 2024 recently amid subdued manufacturing activity in combination with the growing use of new energy vehicles (ie gas and electric powered). However, the largest stimulus package since the pandemic should go some way to easing these concerns. Crude oil also found some support from rising tensions in the Middle East. Israel carried out more air strikes on Hezbollah targets, with the death toll reaching 500. This included Hezbollah commander Ibrahim Muhammad Qabisi. The Iranian-backed militant group also asked Iran to attack Israel in recent days, according to Axios. There are also rising risks to supply in the Gulf of Mexico. Hurricane watches have been issued along Florida’s western coastline as Tropical Storm Helene gathers in ferocity.
European gas edged lower as some weather forecasts pointed to a shorter cold spell over the next few days, leading to weaker demand. North Asian LNG prices also dipped as the recent gains led to some buyers pulling back from the spot market.
Chart of the Day
Beijing's stimulus packaged appeared to target the real estate market. However, it will take some time to work down the high level of unsold inventory before demand returns strongly.
European Oil Markets Editor at OPIS (Dow Jones Energy), Mum of 3
3moThank Daniel! Your reports are very useful.