Published on Australian Financial Review (Original Article Here, subscription required) – Sarah Jones
Commodities including crude oil and iron ore rebounded amid investor optimism that China is shifting into stimulus mode to try and bolster its economic recovery from the pandemic.
Crude oil prices steadied above $US69 ($102) a barrel on Wednesday after jumping more than 3 per cent in the previous session, which was the most in five weeks. And iron ore prices rose for a second day after rallying to a near eight-week high of $US114 a tonne.
Perth-based money manager Katana Asset Management’s Romano Sala Tenna said expectations of a broad stimulus package in China were acting as a “sugar hit” to market sentiment.
“People are thinking that China has turned on the taps again,” he said in an interview from Perth. “The last few times they have done that, it’s been great for resources, but it’s been incrementally less positive each time.
“I think the bigger impact will be on sentiment rather than on the underlying fundamentals. It will be positive, but it won’t be the same as previous stimulus cycles.”
The fund manager added that the broader concern about the global economy had weighed on commodity prices with parts of Europe at risk of tipping into a recession along with the US and in Australia.
A report from Barclays said the world’s second-largest economy was now entering a rate cut cycle after China’s central bank unexpectedly lowered its short-term interest rates for the first time in nine months on Tuesday.
Barclays said it expected the People’s Bank of China to accelerate its monetary easing into next year with several cuts to interest rates and the reserve requirement ratio.
The bank forecasts a 10 basis-point reduction in policy rates in every quarter from the third quarter of this year through to the first quarter of 2024.
Barclays’ economists, led by Jian Chang, also expect China to reduce the reserve requirement ratio for banks by 25 basis points each in the third quarter of this year and first three months of next year to boost credit expansion.
For mortgage rates, the base case was for a reduction of 60 to 80 basis points for both existing and new home loans in the next nine months.
Ben Cleary, fund manager at Tribeca Investment Partners, said the timing for China’s next stimulus package made sense given Chinese PMIs had recorded a couple of negative reads below 50.
“When you have seen that in the past, stimulus has been announced,” he said. “We are going to start to see more of stimulus measures announced in coming weeks. [The economy had] started to soften over the second quarter and everything that China’s government has been saying recently has the bias towards easing.”
He also noted that the rebound in commodity prices and producers over the last few days was “not surprising” given that investor positioning in commodities had fallen to record lows.
“It’s not going to take much for sentiment to rebound,” Mr Cleary said. “I guess the question is now is it going to have a meaningful rebound for commodities and commodity producers.”
Along with the surprise rate cut by China’s central bank, a Bloomberg report that Beijing was considering a broad package of stimulus measures to shore up the world’s second-largest economy triggered the rally in commodities.
While interest rate reductions were reported by Bloomberg to be among the policies under consideration, other measures included support for real estate and domestic demand.
Earlier in the week, West Texas Intermediate dropped 4.3 per cent to a three-month low as Goldman Sachs cut its forecast for the third time in six months. Crude is down about 17 per cent since mid-April.
Brokers have also been bearish on the outlook for iron ore with Citi the latest to predict that the rally in the steelmaking ingredient won’t last, warning that a lack of meaningful stimulus in China would hold back the expected recovery in steel demand.