Stimulus hopes lead to commodities rally in China

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Against a backdrop of positive thinking regarding stimulus plans in Beijing, Chinese commodities have enjoyed a major rally, with assets from cotton to nickel perking up and a cautious optimism surrounding commodity demand.

The stimulus is much needed in order to help boost the country's sluggish economy, confirmed Helen Lau, an analyst at the Hong Kong-based Argonaut Securities. "There are headwinds in the domestic market and exports and for the government to achieve its macroeconomic targets they need to focus on more stimulus in the second half of the year. That will be good for commodity demand," said Ms Lau.

Overall, Chinese commodities have outperformed stocks over the course of this year as investors continue to flock back into the sector following a major glut which hindered the market. In April of this year, a rally was seen across the commodities sphere and a huge spike in speculative activity was only prevented by actions taken by exchanges, which curbed this potentially damaging activity.

Following the Brexit vote, Chinese investors are once again upping their risk appetite and looking for new investments as the uncertainty about which way Britain would vote — and the resulting consequences — begin to ease.

In terms of the most popular commodity futures, rebar and iron ore saw the most gains, hitting their highest levels in two months and becoming the most-traded futures.

Rebar on the Shanghai Futures Exchange rose by 5.3 per cent to $370 a tonne, while iron ore on the Dalian Commodity Exchange increased by 4.9 per cent, Reuters reported.

Ms Lau said: "The tight supply and expectation of more fiscal stimulus by the government to shore up the economy may continue to boost sentiment in both spot and futures market."

In terms of other highly traded commodities, the most-traded cotton contract on the Zhengzhou Commodity Exchange increased by five per cent — the maximum allowed rise — and closed at its highest level since May of 2014. Meanwhile, Shanghai nickel rose by its maximum allowance too, at six per cent, taking it to its highest level since November of last year. Tin skyrocketed by 7.5 per cent, taking it to its highest level since May 2015.

According to Zhang Qi, an analyst at Haitong Securities in Shanghai: "The A-share market shows strong upside momentum today, as market players have digested the most negative news in the past few weeks."

Mr Qi went on to say: "Investor confidence is also boosted by rising commodity futures prices. We expect short-term sentiment to remain good and funds will continue to flow in after a lot of funds retreated from the market at the beginning of the year."

Linus Yip, strategist at First Shanghai Securities Ltd in Hong Kong, agreed with Mr Qi, saying that the market was "expecting some stimulus policy” following a series of disappointing Chinese economic data and the decision by Britain’s to exit the European Union. “Chinese stocks are still in a good run. The Shanghai Composite may test the 3,000 resistance level," added Mr Yip.

The MSCI AC Asia Pacific Index, which provides an overall barometer of stocks in the region, looked set at the start of this week to claw back all of the losses it incurred since the close of June 23, when Britain's decision to leave the EU sent shares plummeting and rocked global markets.

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