Commodity weekly: Back in black supported by China stimulus
By Ole. Hansen, Head of Commodity Strategy at Saxo
A commodities sector under mild selling pressure for a while finally found a bid this past week, driving a broad rally across most sectors, not least industrial metals and energy. The demand outlook brightened after the People’s Bank of China, in their latest efforts to prop up the economy, surprised the market by announcing a bigger-than-expected cut in its reserve requirement ratio. The move, seen as an attempt to prop up confidence in an economy suffering from disinflation, a property market slump and a recent $6 trillion stock market rout, helped trigger a stock market bounce while supporting gains in iron ore and China-centric industrial metals.
In addition, US Q4 GDP surprised to the upside, and with the inflation metrics cooling, the report did not hurt the markets’ belief in US rate cuts, with a 50/50 chance of the first being delivered at the March 20 FOMC meeting. Market sentiment has also improved with a renewed fall in US Treasury yields and a US earnings season which so far has surprised to the upside. All in all, these developments have seen the Bloomberg Commodity Index head for its first weekly gain in six weeks, with the index now up on the month, with gains this past week being led by crude oil and fuel products. At the bottom, we find EU and US natural gas, both falling amid the prospect for milder weather and with just a few weeks of winter left, the risk of a cold-weather demand spike easing.
The energy sector, heading for its best week since October, was supported by rising geopolitical risks despite Chinese authorities asking Iran to curb Houthi attacks in the Red Sea, saying that if China’s interests are harmed it could impact commercial relations with Iran. In addition, support was also provided by a big weekly drop in US stockpiles, albeit somewhat distorted by the recent cold ‘bomb’ which slowed production, imports and refinery activity, and not least news that China, the world’s biggest importer of crude oil, had stepped up efforts to support the economy. These developments saw Brent and WTI top out of their recent ranges with technical buying adding some additional upside momentum.
Industrial metals, stuck in the mud for months, made a so far unsuccessful attempt to break higher. The rally was led by the beaten down metals of nickel and aluminum, the latter finding some additional support from a possible widening of an EU import ban on Russian aluminum products from 12% to 100% in the upcoming 13th sanctions package against Russia, planned to be approved by February 24. Copper prices, meanwhile, rose with the initial rally being driven by wrong footed short sellers who recently flipped their HG copper futures position from a net long to the biggest net short since 2022. We maintain a positive outlook for copper given the prospect of an increasingly tight market towards the second half of the year. However, given current worries about China, despite the latest dose of stimulus, and ongoing speculation about the timing, pace and depth of incoming US rate cuts, the direction for now will likely be decided by short-term trading strategies, like the short covering rally seen this past week.
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