China stimulus, commodity stocks boost small caps

Kevin Pendley | Nov 10, 2008 10:05am EST | Comment

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Small-cap stocks jumped higher on the opening, lifted by news of a large fiscal stimulus plan out of China, and by a surge in commodity-related shares. At 9:54 a.m. ET, the Russell 2000 (NYSE:IWM) was up 5.81, or 1.15%, at 511.60.

China, which houses the world’s fourth-largest economy and which single-handedly accounted for 27% of global growth last year took an aggressive stance to stir up business activity, announcing plans for a fiscal stimulus package of $586 billion, primarily for infrastructure purposes. Traders saw the news as a good sign to help counter global slowing, and to perk up demand for commodities.

Crude oil prices were up nearly $4 a barrel, gold jumped 4% and copper prices surged about 8% overnight. BHP Billiton, the world’s largest mining company, soared some 13% ahead of the opening. In fact, metals and mining stocks were the top early performers today. Freeport-McMoRan Copper & Gold Inc. (NYSE:FCX) was up 11%, while Titanium Metals Corp. (NYSE:TIE) was up 4.2% and Newmont Mining Corp. (NYSE:NEW) was up 6.3%

In a research report this morning, analysts at Goldman Sachs said the China stimulus plan was “a major measure that signals the government's commitment to address the gathering signs of economic weakness in China. While the total size of the stimulus is still unclear (the headline total appears to rely on a smaller federal government commitment and may include some spending that would have occurred anyway), there is no doubt that this is a large and positive step … as we have argued before, more aggressive stimulus outside the US is a necessary and welcome development in dealing with the current broad-based global slowdown. Alongside European monetary easing last week (and the United Kingdom's particularly large move), we seem to be heading more firmly in the right direction on this front.”

Financial shares got a lift from a G20 statement over the weekend saying that “coordinated” action was needed to fight the global financial crisis, which spurred hope for further central bank rate cuts around the world. Citigroup Inc. (NYSE:C) was up 3.3%, while JP Morgan Chase and Co. (NYSE:JPM) was up 1%.

Some traders were still debating the impact of last Friday’s employment report, which showed the unemployment rate climbing to the highest point in 14 years. Despite the dour picture of the nation’s employment cycle, the stock market generated a rally. This week finds a drought in economic data until late in the week, with retail sales data coming Friday morning. There is a partial holiday on Tuesday for banks and government offices via the Veteran’s Day holiday, but the stock market and futures trading will be open for business.

McDonald’s Corporation (NYSE:MCD) same-store sales numbers came in today, climbing 8.2% and shares for MCD were up 4% shortly after the open. Also, American International Group Inc. (NYSE:AIG) jumped 27% on news that the government will increase the package to AIG and also buy $40 billion in preferred stock for the insurance giant.

Individual small caps on the move this morning were highlighted by Centennial Communications Corp. (Nasdaq:CYCL), which rallied 103% on news that AT&T Inc. (NYSE:T) would buy the firm for $944 million. Teekay Tankers Ltd. (NYSE:TNK) jumped hard on the opening, but trimmed much of those gains away and was up about 6% without fresh news. Delta Petroleum Corp. (Nasdaq:DPTR) rose 20%, but was still in pain on news late last week that Tracinda Corp. decided not to go ahead with a tender offer for the company. On the downside, XenoPort Inc. (Nasdaq:XNPT) slumped 22% as the company withdrew a restless legs syndrome new drug application.

Looking at the chart picture, the market is testing the waters around the 514.50 zone early on; a decisive push through that point would set up a run toward 525. Above 525, the next resistance area of note is near 534.50. If the market fails to sustain upside momentum through 514.50 this morning, then there is mild support around 506, then down at 500 and 495.