Commodities Tumble And Dollar Rises As China Rate Cuts Signal Slowdown

Talking Points:

Risk-on in Asia held commodities steady after Friday’s crash on implication of China rate cuts

Gold lowered although it remain supported before central bank events

Oil tumbled below 45 at signs that US supply is swelling

Copper neared 3-week low due to uncertainty of China’s demand

China announced an easing measure of double interest rate cuts late on Friday. 1-year lending rate was cut to 4.35% from 4.6% and reserve requirement ratio (RRR) to 17.5% from 18%. It also removed the ceiling for banks’ deposit rate. The move echoed European Central Bank’s hints of stimulus expansion last week and likely precedes chain reaction among other central banks: Bank of Japan, Reserve Bank of Australia, Swiss National Bank.

US dollar jumped after the event, inadvertently crashed commodities prices. Perception of China stimulus as a sign of slower manufacturing growth also hurt demand prospects. Although market sentiment reversed to risk-on in Asia trade, commodities have not recovered.

Gold lowered modestlyafterthe news of China’s easing. Continual easing actions by the world’s central banks should provide reasonable support to gold as a store of value and as competition loosens from interest-yielding assets.

Copper continued to weaken even as Asia market loaded on risk assets. While copper on Shanghai Future Exchange roughly stabilized above a two-day low, copper on NYMEX plunged close to the lowest since October 8 at 2.3305. Copper will likely stay weak due to mixed interpretations whether China’s easing is good for growth or it is an outward sign of slowdown.

Oil tumbled below 45 to a new 4-week low on Friday and stabilized in the proximity amid risk of a supply glut. US drillers only dropped 1 active rigs last week, according to Baker Hughes. This added to oversupply threat after EIA’s data showed US stockpiles have consistently increased since September 18.