China's Interest Rate Hike Chills Commodity Markets, Except for Gold

Strategic Insights -

China's People's Bank of China announced a 25 basis point interest rate hike, the third such increase since October, to cool its rapidly expanding economy. This move sent shockwaves through commodity markets, with many experiencing significant price drops, including copper, cotton, and light sweet crude. However, gold futures rallied to a two-week high as China acknowledged continued inflationary pressures.

Key Takeaways:

  • China's interest rate hike cooled commodity markets, particularly copper, cotton, and light sweet crude, which dropped to 7-session lows.
  • The price of copper fell 0.7% to $4.5445 per pound, cotton futures were down 0.5% at $1.7356 a pound, and light sweet crude fell 72 cents to $86.76 a barrel.
  • Despite the interest rate hike, strong global demand and dwindling supplies are expected to fuel a rebound in prices, particularly in commodities like copper and cotton.
  • China's appetite for meat pushed soybean futures to a 2.5-year high, but prices weakened overnight due to the interest rate hike.
  • Gold futures rallied to a two-week high, reaching $1,363.40 per troy ounce, as China acknowledged continued inflationary pressures.
  • The state has used monetary tightening to curb inflation, but Standard Bank's Leon Westgate warns that China may need to embark on more aggressive tightening measures if inflation surges.

Statistics:

  • 25 basis points: the interest rate hike announced by China's People's Bank of China.
  • 450,000 metric tons: the global deficit of copper forecast by consultancy VM Group for this year.
  • 20%: the gain in cotton prices so far this year.
  • 71%: the portion of China's Consumer Price Index increase in 2010 attributed to higher food prices.
  • $8.80: the price of wheat at the Chicago Board of Trade, up 2.5% to a fresh 30-month high.
  • 2.5-year high: the price of soybean futures, which weakened overnight due to the interest rate hike.

Sources:

  • Dow Jones Commodities News via Comtex, Feb 08, 2011.
  • FuturePath Trading, Frank Lesh, broker and futures analyst.
  • VM Group, consultancy.
  • Price Futures Group, Jack Scoville, vice president.
  • Farm Futures, Bryce Knorr, analyst.
  • RBC Capital Markets Global Futures, George Gero, vice president.
  • Standard Bank, Leon Westgate.
  • UN, warning of a severe drought in China's main winter wheat region.