It seems that markets are diverging in interpreting the impact of China’s stimulus, which has led to fluctuations in commodity prices since the weekend. The added uncertainty, however, has impacted currencies, as the dollar has been gaining strength. Gold is one of the few hard assets able to hold its ground, but that likely has more to do with its refugee status.
A much-anticipated press conference on Saturday left markets both underwhelmed and reassured—depending on who you ask. China’s Minister of Finance Lan Fo’an announced a series of stimulus measures but didn’t provide specific details about them, primarily how much would actually be spent. Traders in China had a positive reaction, pushing up commodity prices. But Western analysts were less optimistic, pushing commodity prices down again.
Who’s Right?
The future of commodity currencies, at least in the short term, rides on which faction has the correct assessment. China has made major stimulus announcements before that have fizzled out. On the other hand, this time around, the authorities seem to be taking more serious measures, as they are unprecedented.
One way to explain the discrepancy is that the government hasn’t attached a specific yuan amount to the measures because the National People’s Congress must approve such a figure. The government might be reading a situation that needs to get out ahead and provide some additional support ahead of the Congress’ meeting at the end of the month. That’s when specific figures might be provided, which would likely do more to reassure Western traders and help commodities move higher.
It’s Demand Concerns
Crude prices also saw significant declines. The headlines attributed that to leaked reports in American media that Israel would not attack oil infrastructure in Iran. But this also coincided with OPEC cutting its demand forecast for crude oil as signs of a global slowdown mount. That includes the world’s largest crude exporter, China, with slower demand expected through the winter months.
On the other hand, trade data for September showed that China increased iron ore imports. Not only that, it had the largest monthly increase in steel exports in years. However, those gains in volume didn’t lead to dollar-value increases because lower prices incentivized buyers. Stocks of iron ore have been building up in Chinese ports, as demand still remains weak. Analysts believe that shipments will improve in anticipation of the construction season in China combined with the effects of the stimulus.
Where To From Here?
Optimistic traders might seize on higher export volumes as a signifier that demand is returning. Pessimistic traders could focus on largely stagnant prices, a sign that buyers are not sure there will be a large surge in demand.
One of the events that could offer some clarity in the near term is Friday’s release of Q3 GDP figures from China. The data is almost entirely from before the stimulus announcements, but if it manages to outperform, then markets might become more convinced that China will manage to reignite growth this time. China is expected to report an increase in the quarterly GDP growth rate to 1.2% from 0.7% prior. But the annual rate is seen falling to 4.5% from 4.7% previously, missing the government’s 5.0% target.
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