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The risk markets got off to an ominous start in October.
After a blistering rally through the first nine months that led the S&P 500 (^GSPC) to its best performance since 1997, the benchmark just suffered its worst day in three weeks on Tuesday.
Geopolitical tensions and an Iranian missile attack on Israel dominate the headlines, driving crude oil prices higher as fears of supply disruptions escalate. The International Longshoremen’s Association’s first strike since 1977 — which is once again threatening supply chains and potentially closing ports from Houston to Boston — isn’t helping.
But there is another key driver making commodities structurally bullish: China’s largest stimulus package since the pandemic, with the promise of more to come.
Last week, China launched a series of monetary and fiscal easing measures, catapulting the Chinese benchmark CSI 300 Index (000300.SS) 27% off its September low into new bull market territory.
New support for China’s troubled housing market this week comes on top of earlier measures – including support for China-listed stocks – which now total more than $500 billion (although estimates vary widely).
These aggressive actions are already reverberating across global commodity markets. Iron ore futures have risen more than 20% in China, prompting Jim Bianco, president of Bianco Research, to express his thoughts on X:
“The fact that Chinese are finally boosting domestic demand gives hope that they will start consuming more. This idea is contributing significantly to this unfolding rally in industrial metals.”
If we connect the dots, it’s a short trip to higher energy prices. As Bianco notes, “The Chinese consume more energy than the US or the EU.”
Institutional investors have been caught flat-footed everywhere. According to the BofA September Global Fund Manager Survey, Chinese growth expectations had fallen to a record low. Any shorts are probably mixed up.
Meanwhile, WTI (WTI) and Brent (BZ=F) crude oils are rising with the Iranian missile attack on Israel, with the former rising almost 8% on Tuesday.
But US consumers may not feel the pressure on oil and gas prices as OPEC+ was already on track to increase production by 180,000 barrels per day from December. This move, led by Saudi Arabia, would increase their market share at the cost of lower prices.
For American stock investors, there could be a trade in the confusing geopolitical battle that they can profit from. In a separate report published on Tuesday, BofA Global Research upgraded the Materials (XLB) sector to Overweight, saying the sector has the highest correlation with China’s economic growth.
BofA noted that large-cap materials suffered the most as the Federal Reserve aggressively raised rates starting in 2022. It also highlighted the underweight positioning of the sector by long-only managers, both of which leave room for a possible revaluation as Chinese demand increases.
‘Underinvestment in production, single-family homes [homes], [and] mining over [the] last decade should drive [materials prices] higher,” the bank said.
It seems that raw materials are ready for a moment.
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