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Silver – rallies past $32 as China announces stimulus

On Tuesday, silver surged sharply higher on an unexpectedly huge stimulus package announced by China's Central Bank and the Chinese authorities. Industrial commodities, especially base metals were significantly higher in anticipation of demand revival, which is positive for the metal. However, the jury is out on the possibility of real demand picking up given the continuing deleveraging and weak consumption pattern.  

The metal closed with a hefty gain of 4.80 per cent at $32.10.

The US Dollar Index fell on healthy risk appetite and weak US data as rate cut bets fuel continued to dominate the trading sentiments. The US yields slipped on disappointing US conference board confidence data, which boosted the commodities further.

China's Central Bank cut RRR (required reserve ratio) by 50-bps, 7-day repo rate from 1.70 per cent to 1.50 per cent and reduced downpayment for second home buying to 15 per cent from 25 per cent. In addition, the medium-term lending facility (MLF) is likely to be reduced by 0.3 per cent. 

The Bank will also provide full coverage of loans for local governments purchasing unsold homes, up from the previous 60 per cent. The PBoC also announced at least 500 billion yuan ($71 billion) of liquidity support for stocks along with a swap facility allowing securities, funds and insurance companies to tap the PBOC to buy stocks. Traders expect more fiscal measures in the next few days as Xi’s 24-member Politburo is set to meet ahead of a weeklong annual National holiday starting October 1.

Data round up

Global manufacturing and services PMI data released on Monday fell short of expectations as the data out of the UK, the US and the Euro-zone trailed their respective forecasts, though the S&P Global US services PMI came in at 55.40 Vs the forecast of 55.20. US data released on Tuesday stoked fresh concerns about the US economy as Conference Board consumer confidence fell well short of expectations.

The CB Confidence Index came in at 98.7 vs the forecast 104. Current conditions component slid from 134.6 to 124.3, the lowest reading since March 2021. The Conference Board data revealed that Consumer Confidence has hit its lowest level since August 2021 on employment and economic concerns. The labour differential metric fell to 12.6, reflecting a softening labour market.

US Dollar Index and yields

The US Dollar Index fell on weak CB confidence data and risk-on sentiments.

The Index closed 0.57 per cent lower at 100.34 as it nears its cyclical low of 100.22.

The ten-year yield plunged from 3.81 per cent, its highest level since September 4, to close 0.37 per cent lower as the CB Confidence data fell short of expectations. The two-year yields, more sensitive to monetary policy adjustments, was down 1.37 per cent, which steepened the yield curve.

Fedspeak

Fed Governor Michelle Bowman, who is usually hawkish, warned that risks to inflation remain significant. She called for "a measured pace of cuts" to prevent the risk of reigniting inflation.

India’s silver demand

India’s silver imports surged in August 2024. Imports hit $1.33 billion, a sharp rise from $158 million in August 2023.

Geopolitical watch

Geopolitical tensions remain elevated as Hezbollah urged Iran to attack Israel.

Outlook

China’s huge stimulus is positive for the metal, though consumer demand continues to be weak. The white metal market balance is likely to be in a deficit of around 20 per cent this year as sizeable deficit is likely next year, too.

The Dollar Index can undergo a steep decline if the crucial support at 100 is breached, which will be positive for commodities. 

Upcoming US PCE inflation data and the Fed Chair Powell’s speech will be crucial. Silver needs to take out its double top high at $32.52 (MCX December contract Rs 93,700) to gain traction for a target of $35 (Rs one lakh) by the end of the year. Support is seen at $31.75 (Rs 91,500)/$31 (Rs 89,500).

(Disclaimer: Praveen Singh is Associate VP, Fundamental Currencies and Commodities at  Sharekhan by BNP Paribas. Views expressed are his own.)