PBOC Rate Cut & Commodities

So, financial markets continue to be weighed on by poor economic data and moves by policy makers to prevent a rapid deceleration in economic activity. China is one example, where it cut its lending rate by 108bps. This demonstrates how concerned Chinese officials have become regarding a faster than anticipated slowdown in their economy. What does this mean for global growth and commodities? Well, global growth is expected to slow rapidly according to the OECD, with a recession in the US and Europe. A hard landing in China, possibly to 6-7% in 2009 would exacerbate the growth problem.

My first thought when reading that the People's Bank of China cut interest rates, was that commodity markets would dump, particularly base metals. In fact, they rallied slightly according to bloomberg ( apologies, can't find the link), and the logic is that China has now addressed its growth problem. Wrong! While a sharp bounce was the knee-jerk reaction, commodity prices will continue to decline as concerns of a hard global landing come to the fore, and policy makers prove too slow to prevent a deceleration in economic acitivity in China. Emerging market countries, and in particular, China were supposedly 'immune' to a US downturn, and had 'decoupled' from the developed world economic cycle. This proved to be a myth.

End game: Slower growth = lower commodity prices ( no two ways about it)