The best performing ASX 200 miners after China's stimulus drive

The S&P/ASX 200 Materials Index rallied 9.3% last week after China's central bank announced a broad range of stimulus to restore consumer confidence, revive its beleaguered property sector and hopefully bring economic growth back towards its 5% target.

This marked the index's best weekly performance since October 2015, when it gained 10.3%. Such rallies of 9% or more have only occurred seven times for the Materials index since 2007.

The stimulus announcement triggered a sharp uplift across various commodities, including copper, lithium, coal, nickel, and iron ore.

Iron ore (blue), copper (red), aluminium (green) and gold (yellow) | Source: TradingView

China's stimulus push

Last Tuesday, the People's Bank of China announced its biggest stimulus since the pandemic. This included:

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

China continued to fire up stimulus efforts on Friday, with:

• Cut reserve requirement ratio (RRR) by 50 bps

• Plans to issue special sovereign bonds worth approximately 2 trillion yuan (US$284 billion)

• Plans to issue 1 trillion yuan (US$162 billion) to increase subsidies on a consumer goods replacement program and business equipment upgrades

#1-10 Best Performing ASX 200 Miners

Data as at Friday, 27 September 2024

#11-20 Best Performing ASX 200 Miners

Data as at Friday, 27 September 2024

A short-covering rally

Short sellers have been piling into the resource sector in the past couple of months, to benefit from downward spiraling lithium prices, companies with stressed balance sheets and China's poor economic outlook.

The aggressive stimulus measures likely forced many short sellers to cover their positions, driving an outsized move to the upside. Notable short interest levels prior to the rally included:

• #1 Most shorted stock on the market: Pilbara Minerals 19.51%

• #4 Mineral Resources 12.37%

• #7 Lynas Rare Earths 10.67%

• #8 Liontown Resources 10.13%

• #19 Sandfire Resources 6.75%

• #28 Rio Tinto 5.34%

While the rally has been strong, some analysts remain cautious . Citi analysts believe "a China policy U-turn has fuelled a further short-covering rally in the metals complex but signalled fiscal policy stimulus is lacking in detail."

"However, the absence of meaningful follow-up (particularly of fiscal measures) to prior Beijing stimulus announcements has a pattern of disappointing the market, with rallies fading; the rally in April-May this year is a notable recent example."

Despite this caution, many miners continued to rally, with names like BHP, Fortescue, MinRes, and South32 showing gains of 2-3% on Monday.

The V-shaped move has pushed many miners into the most overbought conditions in the past decade. Such overbought conditions can unwind differently on whether it's a bull or bear market. In a bull market, overbought stocks become more overbought. In a bear market, overbought stocks collapse under its own weight.

"We could rally further on momentum and positive newsflow, but there is much uncertainty in the near-term amid a lack of China stimulus detail, US labour market deterioration, and election uncertainty," says Citi.