China stimulus spurs rebound in metals, Russian court orders stop to Caspian oil pipeline

We learnt at the end of June that China’s manufacturing purchasing managers’ index (PMI) rebounded in June, indicating expansion for the first time since February as major cities gradually reopen from the Covid-19 lockdowns.

The index rose to 50.2 in June from 49.6 in May, a tick lower than the expected 50.5. A PMI reading above 50 represents growth while a reading below represents a contraction. Employment fell for the third month in a row and new orders rose to 50.4 from 48.2 in May. However, export orders still remained in contraction territory, rising to 49.5 from 46.2 in May.

Investors were concerned that iron ore could face a challenging quarter despite the fact that President Xi Jinping’s pledge of support to the economy could help the infrastructure sector and labour market.

The day after President Xi’s pledge, the Beijing government announced a US$45 billion stimulus measure to finance infrastructure projects. This is a move to drive investment and increase employment for the second half of the year.

Today, according to Bloomberg, investors found out that China’s Ministry of Finance is mulling on allowing local governments to sell US$220 billion (1.5 trillion yuan) of special bonds in the second half of this year as a measure aimed at fast-tracking the economy.

The prospect of stimulus once again provided much-needed optimism for investors, lifting commodities including metals and oil, which is back above US$100 a barrel. Also the easing of the US dollar assisted. A rising US dollar makes buying commodities more expensive for producers trading in other currencies.

However, a Russian court on Tuesday ordered a 30-day stop in oil loadings from the Caspian Pipeline Consortium in the Black Sea. More than 30 million barrels of mostly Kazakh crude gets exported through this pipeline each month. The reason given is that the facility violated its oil-spill prevention plan.

If the pipeline is shut down, oil spot prices would rise due to producers scrambling for alternative options.

Local resources stocks could catch a bid today.

Commodities

Iron ore is trading 2.2 per cent higher at US$114.85 a ton
Iron ore futures are pointing to a 3.1 per cent rise

Thermal coal rose 2.6 per cent to US$410 a ton

Copper added 4.2 per cent to US$3.55 a ton
Aluminium rose 1.7 per cent  to US$1.10 a to
Zinc gained 4.4 per cent to US$1.44 a ton
Nickel fell 1.4 per cent to US$9.74 a ton
Alumina lost 1.4 per cent to US$355 a ton

Oil rose $4.20 or 4.3 per cent to US$102.73 a barrel
Gold added $3.20 or 0.2 per cent to US$1,740 an ounce

Sources: Bloomberg, UBS