Iron ore, copper and lithium stocks are soaring. Here's why.

China's central bank unveiled a flurry of stimulus measures on Tuesday, triggering a broad-based rally for commodity prices and resource stocks.

The S&P/ASX 200 Materials Index finished the session 2.4% higher, the highest since 5 August, and the biggest single-session rally since 15 September 2023.

S&P/ASX 200 Materials Index 12-month price chart (Source: Market Index)

The Index is up another 2.7% on Wednesday afternoon, to a two-month high. This marks the largest two-day rally since 14 November 2022 amid a sharp rebound in iron ore prices.

China's stimulus blitz

The People's Bank of China announced broad monetary stimulus and property market support measures, including:

• A 20 bp cut to its new benchmark, the seven-day repo rate, to 1.5%

• Repo rate cut leads to an approximate 30 bp drop in medium-term lending facility rates and a 25 bp drop in the loan prime rates

• A 50 bp reserve requirement ratio (RRR) cut – the RRR is the percentage of deposits that banks are required to hold as reserves. Lowering the ratio allows banks to lend more

• RRR cut frees up approximately 1 trillion yuan (US$142 billion) for new lending

• Commercial banks will be guided to lower interest rates on existing mortgages by 50 bps to provide relief to households

• This is expected to benefit more than 50 million households and ease collective interest repayments by 150 billion yuan (US$21 billion)

• Down-payments for second-home buyers will be eased from 25% to 15%

• A new swap program of 500 billion yuan (US$71 billion) allows funds, insurers and brokers easier access to funding for share buybacks

Earlier this month, investment banks including Citi and Goldman Sachs lowered their full-year projections for China's economic growth to 4.7% after key economic indicators, including industrial output, retail sales and property prices, weakened further.

Early analyst takeaways flagged skepticism about the latest measures' ability to improve China's ailing economy. They noted the need for more aggressive stimulus to boost domestic demand and more aggressive financial restructuring measures to address structural headwinds in the property sector.

A Bloomberg article noted some interesting takeaways from economists, including:

• "Delivering them all at once is highly unusual and speaks to the urgency felt in Beijing to head off deflationary risks and get growth on track for this year’s 5% target ... We estimate the boost to 2024 growth to be around 0.2 ppt, with most of the impact falling in 2025." – Chang Shu, Chief Bloomberg Asia economist

• “If policymakers go back into wait-and-see mode ... the initial burst of market enthusiasm might fade.” – Christopher Beddor, Deputy China Research Director at Gavekal Dragonomics

• “We are not sure how much the mortgage rate cut will induce a property recovery.” – ANZ chief greater China economist Raymond Yeung

Resource stocks surge

Most major resources stocks have rallied 5-10% since Tuesday. This rally has propelled several heavyweight names back into positive territory in terms of twelve-month returns.

Data as at 11:30 am AEST Thursday, 25 September 2024

Where to from here?

Several key commodities have bounced strongly since Tuesday, including:

• Singapore iron ore futures up 9% to US$98 a tonne, the highest since 2-Sep

• Copper futures up 4.0% to US$4.52 a pound, a two-month high

• Aluminium up 4.0% to US$2,558 a tonne, a three-month-high

The policy measures have sparked a modest price uptick, but the market demands more. China must implement more robust measures or demonstrate stabilising economic data to sustain this momentum. While these current moves boost liquidity and free up reserves, the impact is limited if underlying loan demand remains weak. The real concern lies with Chinese consumers: If they continue to hesitate, faced with declining corporate profits, rising unemployment and falling property prices, economic stagnation may persist.