FED and PBOC add momentum to commodities market rebound

Key points

• The commodities sector remains on track for a third consecutive weekly gain
• In the past week the sector has been supported by adverse weather, FOMC rate cut and now additional stimulus in China
• Demand dependent commodities from copper and iron ore to crude oil showing strong gains today

The commodities sector remains on track for a third consecutive weekly gain, and following an early September energy-led slump, the Bloomberg Commodity Total Return Index has recovered strongly to reach a two-month high, in the process recouping more than half of what it lost during the May to August correction. The index, which is replicated by several major ETF providers, as shown below, tracks a basket of 24 major commodity futures. It trades up 4.4% on the month (5.4% year-to-date), with all sectors showing a positive performance this month. This includes the energy sector, where losses in crude and fuel products following the early September slump are being offset by a +15% rally in natural gas, as a storm in the Gulf of Mexico threatens to disrupt production.

Besides sugar and coffee, both recording solid gains this month amid extreme weather conditions in Brazil and Vietnam fueling crop concerns, the commodities sector as a whole has been presented with two potential demand-supportive developments. Starting with last week’s bumper 50% rate cut from the Federal Reserve, the first of several, reducing the cost of holding and financing inventory, while also reducing the risk of a demand-damaging recession. This was followed up in China today, when the People’s Bank of China unveiled a broad package of monetary stimulus measures to revive the world’s second-largest economy and top consumer of raw materials. The move underscores mounting worries within the government over slowing growth and very muted consumer confidence.