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Commodities surge after China eases some Covid restrictions

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Commodities from oil to iron ore and copper jumped after China eased some Covid restrictions, raising hopes over a demand recovery in the world’s second-biggest economy.

Almost all major commodities traded higher following news that China reduced the amount of time that travelers and close contacts of infected people must spend in quarantine, a significant amendment of the Covid Zero policy.

Oil futures in New York and London added more than 2%, while iron ore traded in Singapore soared as much as 8.2%. Copper, precious metals and agricultural commodities also all climbed.

The China news strengthened a rally that began on Wall Street, with risk assets broadly higher as lower-than-projected US inflation data set the stage for a slowdown in aggressive interest-rate hikes. A gauge of the dollar has fallen sharply from its 2022 high in recent days, aiding commodities priced in the currency.

“The bulls have been waiting for such a trigger,” said Daniel Hynes, senior commodity strategist at Australia and New Zealand Banking Group Ltd. “These two events may be enough to wash out all the bears and set up a strong and sustained rally.”

In China, industrial commodities from copper to iron ore and steel all spiked. Iron ore futures in Dalian surged as much as 6.6%, their biggest gain in over three months.

Zinc jumped more than 5% to lead gains on the London Metal Exchange, while aluminum advanced 3.8%. In the US, Chicago soybean futures had the biggest intraday increase in a month.

Investors have been closely watching for signs that Beijing will loosen its restrictive policies that had helped derail an earlier run up in prices. A gauge of energy and raw material prices has slumped from its 2022 high as demand from China remained stymied because of the onerous virus-related movement controls.

The news will “further fuel speculation over a broader relaxation of China’s Covid control measures, which is bullish for energy and commodities,” said Vandana Hari, founder of Vanda Insights in Singapore.

The easing comes at a time when Covid cases nationwide have surged, with major outbreaks in Guangzhou and Beijing.

Still, some in the market were less optimistic. Though the relaxation of the rules is a step in the right direction, the jump in oil prices looks like an overreaction given China is likely to pursue its Covid Zero policy, said Warren Patterson, head of commodities strategy at ING Groep NV in Singapore.

“It is difficult to see a strong recovery in international travel and as a result demand, until all quarantine restrictions are lifted,” Patterson said.

© 2022 Bloomberg

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