Since summer, palladium had a remarkably run, rallying 35 percent and reaching a new record high last week. Even more remarkable is the fact that this came at a time of unprecedented weakness in China’s car market.

Sales are on track for a fifth consecutive year-on-year decline this month, suggesting that palladium’s recent rally was primarily driven by hopes of stimulus in China.

According to an article published by Bloomberg yesterday, these hopes could become reality. Yet, palladium sold off during the day and closed almost 3 percent below its highs.

The Chinese government is considering to cut purchase taxes to revive sales, a measure it already introduced in 2015 and which is partly to blame for this year’s weakness.

For more than two years, sales were boosted by the cuts and rose at around double the rate suggested by China’s income level, we estimate.

While renewed tax cuts would lift sentiment and sales in the short-term, this would draw even more future demand into the present and weigh on the longer-term growth outlook of the Chinese car market.

A rebound in car sales could provide another boost to palladium sentiment and push prices back towards the record highs. Due to its small size, the palladium market is very susceptible to such sentiment swings.

That said, prices at or around record levels should not be sustainable, also taking into consideration a softening global car market.

We reiterate our 3- and 12-month price targets of $950 and $900 per ounce.

Any opinions expressed here are the author’s own.

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