Commodities bounce as China unleashes $206b of cash

Monday trading backed this theory, with resources stocks bursting out of the blocks as the local market took a strong lead from Wall Street, where all three major indices added more than 1 per cent. Across Europe, the Stoxx 50 climbed 1.9 per cent, the FTSE 100 rose 1.3 per cent and the DAX jumped 1.7 per cent.

The local market was led by the major iron ore miners with BHP up 3 per cent to $50.95, Fortescue climbing 2.8 per cent to $24.53 and Rio Tinto advancing 1.6 per cent to $127.42 in afternoon trade.

Markets have been widely bracing for a steady removal of support by central banks, but China bucked the trend as the country attempts to reinvigorate its economic rebound.

The PBoC announcement was specifically aimed at supporting small businesses that have been hurt by soaring raw material prices, while also restoring credit growth in China, which has recently shown signs of slowing.

This typically provides a boost to certain areas of the commodity market, according to CBA mining and energy commodities analyst, Vivek Dhar.

“The sharp deceleration in credit growth seen in China might be coming to an end and, historically when credit growth lifts it has resulted in an uptick in commodity prices, particularly base metals, steel and iron ore,” Mr Dhar said.

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Base metals prices responded accordingly as copper jumped 2.1 per cent to $US9482 a tonne while nickel climbed 2.4 per cent to $US18,770 a tonne and aluminium rose 2.3 per cent to $US2481 a tonne.

Strategists pointed to this corner of the commodity market as a key beneficiary of China’s move, particularly copper, given its role as a leading indicator of economic activity.

Re-evaluate outlook

“This slight shift in monetary policy could see investors re-evaluate the outlook for the base metals sector,” said senior commodity strategist at ANZ, Daniel Hynes.

It comes following a recent pullback in copper and iron ore prices from record levels as investors migrate away from the commodities on the belief they had passed their peak.

“There’s been a big washout over the last six weeks and it was made clear by positioning across the board that there was a concern copper and iron ore were overbought,” Mr Cleary said. “It means there’s a fair bit of clean air in those areas of the market.”

This backdrop coincides with solid fundamentals which Mr Cleary believes will elevate commodity prices and push investors back into resources stocks.

“Demand for iron ore outside of China is at its highest point in a decade and while slowing Chinese credit growth threatened prices, this has now been rectified, so where’s the supposed hole in demand going to come from?” he said.

“Cost inflation is going through the roof, so all the major miners are probably going to produce less than they have told the market, so supply will be lower than expected.”