Material Stocks Soar On China's Plan To Ease Currency Peg

21st Jun 2010 15:56

By David Benoit Of DOW JONES NEWSWIRES NEW YORK (Dow Jones)--Material stocks, particularly those most closely tied to the world-wide economy, climbed aggressively on Monday as the Chinese government announced plans to allow more flexibility into the exchange rate on its currency. China's new policy alleviates fears that a tightening there would clamp down on demand. The materials sector recently was, by far, the best-performing group in the S&P 500, climbing 2.1% to the index's 0.9% gain, with aluminum companies, steel companies, miners and others all getting a kick-start from the news. If the Chinese yuan is allowed to appreciate, however gradually, it could increase the country's purchasing power. That thought allowed global markets to exhale a sigh of relief, especially as concerns about China's spending cuts had been a major weight on material shares over the past few months. Credit Suisse analysts said in a note that the last time China announced an appreciation move, the metals and mining sector outperformed the broader market by 31% over the subsequent six months. They looked headed to similar gains on Monday. Aluminum giant Alcoa Inc. (AA) was recently the biggest gainer in the S&P 500, climbing 7.1% to $11.90, while its smaller rival Century Aluminum Co. (CENX) shot up 10% to $11.08 to lead the S&P 1500 index. China's behemoth Aluminum Corp. of China Ltd. (ACH), or Chinalco, saw its American Depositary shares rise 6.6% to $21.29. Steel giants were next in line, with United States Steel Corp. (X) and AK Steel Holding Corp. (AKS) rising 6.1% to $46.02 and 5.5% to $14.66, respectively. Barron's said worries about an economic slowdown in China had helped pound the steelmakers, yet the correction appeared to have run its course as U.S. Steel and AK Steel, as well as Nucor Corp. (NUE) and Steel Dynamics Inc. (STLD), were at depressed--and attractive--levels. Nucor was up 2.6% to $42.55 while Steel Dynamics rose 4.2% to $14.55. Other specialty metals were also rising, with Titanium Metals Corp. (TIE) gaining 4.9% to $20.98 while Allegheny Technologies Inc. (ATI) adding 4.7% to $54.51. Dahlman Rose analysts said that appreciation would also be viewed as a positive for global free trade and the large diversified miners that have large exports to China of iron ore and other bulks. For U.S. miners, Cliffs Natural Resources Inc. (CLF) and Freeport-McMoran Copper & Gold Inc. (FCX) rose 5.6% and 5.8%, respectively, while the ADRs of global behemoths BHP Billiton Ltd. (BHP) and Rio Tinto PLC (RTP) added 4.2% each. And the companies that make mining equipment also climbed, with Caterpillar Inc. (CAT) adding 2.6% and Joy Global Inc. (JOYG) and Bucyrus International Inc. (BUCY) rising 4.8% and 4.4% respectively. Still, as the market leapt at the excuse for a strong rally, some analysts urged caution in dealing with what was an ambiguous statement from China over the weekend. Credit Suisse said that "appreciation helps raising the purchasing power for imported goods, but the demand for commodities and machinery will be determined by economic activities rather than purchasing power." And others, including Roth Capital and JPMorgan, warned the announcement could have been more of a political ploy ahead of a G20 summit later this week, and will have little actual effect on equities. "The statement emphasized that "there is no fundamental support for significant volatility in the spot rate", which suggests that any moves would be very minor," JPMorgan wrote. "As such, to the degree that anyone in the market still expects a one-off, significant appreciation, such expectations will continue to be disappointed." -By David Benoit, Dow Jones Newswires; 212-416-2458; [email protected]; (END) Dow Jones Newswires June 21, 2010 10:56 ET (14:56 GMT)