We've talked about the outlook for a weaker dollar, driven by the recent Fed rate cut and the likelihood of a dramatic decline in U.S. real rates over the next year.
And as we've also discussed, a weak dollar tends to be fuel for commodities prices.
Pretty much every important commodity in the world (food, energy, metals) is priced in U.S. dollars. As such, the value of the dollar tends to have an inverse relationship with the price of commodities. That inverse correlation gives stability to global buying power.
And remember, this comes as the bull cycle for commodities is young, and commodities prices still remain at historically extreme cheap levels relative to stocks.
Add to this, commodities have gotten another tailwind this week out of China.
On Monday, the Chinese central bank unveiled the most aggressive monetary stimulus since the pandemic. It included rate cuts, support for the real estate market and direct support for the stock market.
And then last night, the Chinese government followed that with a comprehensive plan to boost the Chinese economy. It includes about a quarter of a trillion-dollars in fiscal stimulus.
So, this is clear big and bold action by the Chinese government to boost the economy, reverse deflationary pressures and appeal to foreign capital.
In a world where most major global stock markets are sitting on record highs, China becomes a "value with a catalyst" alternative. And that catalyst, is the Chinese government explicitly supporting the stock market.
And this is liquidity that will spill over into global markets, and stimulate global growth.
What commodity is the proxy on global growth? Copper.
What's the biggest mover on the week in global markets? Copper.
As for commodities more broadly, China has a history of stockpiling commodities during periods of fiscal stimulus.
