Metals Rise, Chinese Stimulus Hopes Boost Stocks

September 8th, 2015 by

The global stock markets (with the exception of Tokyo) surged about 2% this morning on the new normal of “Bad News is Good News” in China. The weaker data led the markets to believe more economic stimulus is on the way in Beijing, boosting both Asian and European markets at the possible expense of the dollar: Although the USD bounced back Tuesday morning from a dip overnight, the moves by China are likely to flood the forex and bond markets with dollars and Treasuries.

At the same time, the precious metals were modestly in the green across the board, as well as the semi-precious metal copper.

Both imports and exports fell in China, though the latter came in better than expected. With most expecting that the signs of economic weakness will prompt the People’s Republic to engage in more easing, the Shanghai Composite closed 2.9% higher overnight. The Hang Seng index (Hong Kong) gained 3.3%.

The belief that China will unleash more stimulus may not be overblown. According to Bloomberg,

“Chinese data showed that exports in August fell 6.1 percent from a year earlier in yuan terms, following an 8.9 percent decline in July. Imports dropped 14.3 percent, worse than July’s 8.6 percent retreat.”

yuan-vs-dollarIn addition to disappointing news being a cause for exuberance, part of the story in China is the record-high drop in its holdings of foreign reserves. The People’s Bank’s forex reserves fell by the most ever in a single month during August as the central bank dumped dollars and U.S. T-notes onto the open market in order to support the yuan. Rather than working to devalue its currency any further, China seems to have followed the prescriptions of the IMF by seeking equilibrium with its foreign exchange rate. This continued selling of dollars and Treasuries also has the dual effect of buoying bond yields (less demand) and weakening the dollar against its international peers.

Shares in Europe, meanwhile, rose about 2% across the entire continent this morning. While more monetary easing or Chinese-style moves by the ECB to support the common currency are expected to be in play, these measures would come amid an encouraging period of economic recovery across the Atlantic. Housing prices have been on a rally in Spain, while Q1 Eurozone GDP was revised upward at the same time that the numbers from Q2 (+0.4%) beat analysts’ expectations. The euro was just barely higher around $1.117.

Japan Left Out

japan-recessionThe only major stock exchange that missed the train, so to speak, on the China easing expectations was Japan’s Nikkei 225. The benchmark Tokyo index slumped 2.4% overnight on Tuesday in spite of the dovish signals from China due to second-quarter GDP contracting (though less than expected) for the world’s third-largest economy. Seven shares on the Nikkei fell for every one that gained after Japan’s economy shrank some 1.2% during Q2. The Nikkei 225 has fallen more than 15% in the past month, and is fast-approaching a bear market (a 20% drop from its 52-week high).

Copper Rally

Copper got a nice bump on Tuesday, as well, thanks to major miner Glencore PLC (LON: GLEN) announcing that it is closing its copper mining operations in the two African countries Congo and Zambia. Spot copper was up over 4.4% (more than 10¢) to $2.41 per pound. Although gold slipped back $2 in the red by about 10:30 am EST, the other precious metals held onto their gains: spot silver rose 10¢ to $14.80/oz; platinum gained $10 (+1%) to $1,005/oz; and palladium added $16, or nearly 2.8%, to settle right at $600/oz.