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Surprise Rate Hike from China Triggers Sell Off in Commodities


Commodities are bouncing slightly higher Wednesday amid some dip buying, following the sharp losses in yesterday’s session after China announced a surprise interest rate hike. The 25 basis point (bps) rate increase from the Peoples Bank of China (PBOC) is the first since December 2007, and combined with the safe-haven run on the US dollar, led to a broad sell off across the commodity complexes on fears that China’s attempts to cool their overheated economy would bring about falling demand for all commodities.

The move pushed Nymex light sweet crude to fall over 4%, as did silver, with copper falling around 3.5% and gold shedding 2.7%.

In line with other commodities, base metals took a large hit after the Chinese rate move yesterday; the sector largely dependant on basic materials demand from the country to fuel price growth. Although the hike was undoubtedly in order to curb inflation for the Asian giant, it is still likely to tail back the growth brought about by the governments extensive stimulus efforts made during the global recession – the same growth that has been allowing base metals to show strong recoveries this past year.

However fears that an economic cooling may significantly reduce the country demand for basic materials may be somewhat over done.

With gold for example, the main Chinese driver has been central bank demand in order to diversify reserves away from the US dollar, and in addition, the country has seen a push for private and institutional investors to buy both gold and silver over the past 18 months. As a financial instrument, it may be fair to argue that demand for these metals may falter as the economic growth slows. C

hinese demand for base metals on the other hand, is coming from a very real and physical need for those basic materials required to fuel the country’s large scale production. Although an economic slow down may be expected to curb the extent of this, the country has in fact already set out its intended production targets in its latest 5-year plan. Considering this, China’s need for raw materials does not look like it will falter any time soon, and one could certainly argue that the base complex is best placed to weather any additional slow downs in Chinese growth.

As previously highlighted, precious metals have been managing to stage a small bounce in today’s session as traders take the opportunity to buy commodities on the dip. Spot gold, which plunged around $42/oz yesterday, also saw a one tonne net liquidation from the world’s largest gold ETF, SPDR Gold Shares. From a technical standpoint, yesterday’s sell off found a base at the 21-day moving average around $1,330/oz, which has continued to offer support today.

The move triggered sell-signals in both 10-day momentum and the daily stochastics however, as well as bringing the third consecutive parabolic SAR downtrend indicator. With this, all signs are turning towards a failing uptrend in the metal, although at this stage some consolidation seems more likely than a full reversal. A break below the 21-DMA would now be needed to confirm some downward pressure in coming sessions, while a persistent bounce from the moving average may in fact signal a continuation of the uptrend going forward.

Yesterday’s move by China caused WTI Nymex crude to see its largest 1-day sell off since June this year, pushing the front contract to $79.49/bbl. China is the world’s second largest oil consumer, and as such yesterday’s rate hike worked to emphasise an already shifting price trend for the commodity. With any gains in the Nov10 contract expected to be muted today ahead of its expiry after the bell, the bounce in the Dec10 contract is likely to bring about a mild gap-up as the last of the traders roll their positions today.

Yesterday’s American Petroleum Institute (NYSEMKT:API) inventory data yesterday, as always seen as a prelude to today’s more extensive US Department of Energy (DoE) weekly report, showed a larger than expected 2.3 million barrel (mbls) increase in crude stocks. Expectations are for today’s numbers to show a similar rise in crude stocks, of around 1.5mbls, when the Energy Information Administration (NYSEMKT:EIA) releases the DoE numbers at the usual time of 1030EST, with the Houston Ship Canal going back in service in the reporting period, following repairs the week before.

Expectations are that the increase in crude stocks will also come about from a 0.5 – 1mbls increase in crude imports for the week, while both gasoline stocks and middle distillates are expected to fall by 2.2mbls and 0.8mbls respectively. Expectations for refinery utilisation are somewhat mixed, with most analysts predicting a few basis point move in either direction.

Disclosure: no position