Iron ore stocks lead mining gains

China’s surprise stimulus measures released on Friday have paved the way for commodity-related plays, starting the week on a high.

Mining Truck
Source: Bloomberg

The People’s Bank of China (PBoC) has made the first interest rate move since July 2012, cutting the one-year lending rate by 40 basis points and the deposit rate by 25 basis points.

Market watchers are now watching closely any further signs of a change in direction by the PBoC, which had been pushing down a path of targeted measures.

There are now growing expectations of a bolder policy course by the central bank, possibly in response to a slew of soft macrodata in recent weeks.

Mining stocks rebound

On the back of these boosters for the Chinese economy, there has been a surge in investor optimism particularly in stocks betting on its growth revival. Industrial metals are typically a play on China’s industrial production activity and property sector.

Mining stocks, especially iron ore-related plays, have been the main beneficiary in the opening session. In focus are Fortescue Metals (opened 12.6% higher at $3.03); Atlas Iron (opened 10% higher at $0.22); and Rio Tinto (opened 3.7% higher at $58.46).

The positive sentiment on the sector should also lend an upside bias to the Aussie dollar in the interim.

The question is how long the euphoria will last, as it still remains to be seen whether all these policy moves and posturing translates to gains in the real economy.

What’s worth noting is that from a technical perspective, industrial commodity prices are largely on a downward trend. This includes iron ore, copper and steel rebar. The current bearish bias is likely to keep a lid on any upside in the medium term.

Ahead of the China open

Any positive news could also see a bounce in the overall investor sentiment in Chinese equities.  On that basis, we’re calling for the China A50 to open 2.49% higher at 7,797 points.

However, there will be little macroeconomic data out of China this week providing leads for investors. So it will not be a surprise if we see a pullback later this week in mining stocks and Chinese equities if investors decide to take profit and stay on the sidelines.

The only data scheduled this week from China is tomorrow’s Conference Board Leading Economic Index for October (10am SGT). This is typically not a big market mover as it compiles previously released data points. However, due to the lack of other leads this week it will likely see investors paying more attention. Any improvement from the previous reading of 0.9 could lift market sentiment further.

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