Metal stocks rally on yuan revaluation

The surge in commodity stocks lifted stock markets on Monday following China’s decision to make its currency more flexible.

Metal stocks rallied 5.16% on the Bombay Stock Exchange in anticipation of higher demand from China because of the yuan revaluation. Short-covering in some of the metal heavyweights further helped the cause.

The sharp upmove in metal stocks helped the Sensex close at its 10-week high of 17876.55, up 1.74% from previous day’s close.

“The metal stocks have rallied in anticipation of Chinese demand due to cheaper imports. After the yuan revaluation, China would focus on its domestic growth which will help accelerate imports. Also a weakening dollar has a direct impact in repricing of commodities,” said Dhiraj Sachdev, VP & fund manager at HSBC Global Asset Management.

All the 12 metal stocks on the BSE Metal index ended in the green.

Major gainers were Sesa Goa (up 9.54%), Sterlite Industries (up 8.28%), Tata Steel (up 6.3%) and Hindalco (up 5.61%).

The rise in metal stocks can also be attributed to short-covering as lot of short positions had been built in these stocks ever since the European debt crisis and China’s move to control its asset bubble resulted in a weaker outlook for the industrial commodity stocks.

The BSE metal index has underperformed the Sensex in last 2 months. Since April 22, the index has gone down 16.68% compared with a 0.02% fall in Sensex till Friday.

“The metal sector had been beaten down in recent times and lot of short positions had been built in these counters which may have been covered on Monday,” said Piyush Garg, CIO at ICICI Securities.

China’s central bank on Saturday announced the end of 23-month old fixed rate peg against the US dollar. The People’s Bank of China also said that any strengthening of its currency would be gradual.

Market experts believe that the decision was seen coming for sometime now. “Not much should be read into this as its more of a political move ahead of G-20 meet,” said Garg.

“China’s announcement that it would increase the flexibility of its exchange rate suggests that there would be an appreciation of its currency. This is seen as a positive for exporters of commodities to Chinese markets, which has resulted in a rise in many commodity stocks in India,” said Prakash Diwan, head of institutional sales and strategy at Networth Stock Broking.

However analysts still remain skeptical on the metal stocks due to worries of a global slowdown. “We remain underweight on metals as still there is fear of slowdown in China and Europe,” said Sachdev.

“The upmove in commodity stocks may not last more than 1-2 days after which they may again start to correct as the global outlook still remains uncertain,” said Garg.