The Overnight Report: Commodity Chasers

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By Greg Peel

The Dow closed up 67 points or 0.4% while the S&P rose 0.1% to 2001 and the Nasdaq fell 0.2%.

Big Three

Another day, another 1% rally for the ASX200. But it’s all in three sectors. Those most oversold this year are now those most sought after.

Improving prices for oil, iron ore, copper and other metals saw the local energy sector up 2.2% and materials up 3.1%, including an astonishing 24% jump for Fortescue Metals ((FMG)) as the iron ore futures price began to surge. A rebound in commodity prices implies more confidence in the Australian economy, and yesterday the banks rose another 1.2%.

Today will be interesting. Iron ore is up 19% for reasons unknown.

Consumer staples is another sector that has seen hard times, and it was up 0.5% yesterday, but clearly in order to rotate positioning into the star sectors du jour, investors are creaming off everything else. All other sectors finished slightly in the red yesterday, including the defensives of healthcare, telcos and utilities.

Of course, there has to be a flipside, and for the Australian market that is the Aussie dollar. It’s up another 0.6% at US$0.7471, driven by commodity price strength.

Meanwhile, Australia’s construction sector continues to contract at pace. The construction PMI fell to 46.1 in February from 46.3 in January to mark the fastest pace of contraction in twelve months. In the sub-sectors, single housing construction has slowed but apartment construction is still firing along. Commercial construction expanded but engineering (call it mining construction) contracted for the 20^th straight month.

The good news is the pace of engineering contraction slowed. Economists are expecting the apartment bubble to soon burst, and the housing market in general to ease off in 2016. These are the non-mining drivers the Australian economy needs to offset the mining decline. But if the slowdown in mining investment is beginning to see an end in sight, then the non-mining sectors may not have to work so hard.

Mining is one sector in which worker lay-offs have been substantial. Yesterday’s ANZ job ads series showed a 1.2% fall in February. ANZ’s economists note the strong pace of job ad growth evident in 2015 – which is a reliable indicator of employment – has eased off this past six months. That said, ANZ is not among those expecting Australia’s unemployment rate to climb back through 6% this year.

Oil Switch

Last night the UAE energy minister suggested current oil prices are now forcing OPEC members to freeze production. Not to reduce production, but not to increase it further in a desperate attempt to generate cash. Only so much oil can be produced at a commercial loss.

While we’ve learnt to take anything an OPEC spokesman says with a grain of salt, the UAE minister is not spinning the now hackneyed line of “We’re all going to meet and agree to production cuts/freezes”. He’s simply saying “It’s happening anyway”.

Until this last rebound in the oil price, each previous rebound has been sparked by production cut talk from OPEC and Russia, which the market finally came to realise was just a ploy. But this latest rally has more to do with evidence of falling US production, which actually gets to the heart of the matter. If OPEC is actually freezing production levels as well, because it has no choice, then all the better.

Last night oil prices jumped over 5%. WTI settled at its highest level in 2016 and Brent hit US$40/bbl for the first time since Christmas.

Which should translate into a big rally for the US stock markets, given the near 99% correlation to the oil price witnessed over the past two months. But the Dow is up only 0.4% points, and the S&P 0.1% because the Nasdaq is down 0.2%.

Like Australia, the US market is responding to what appears to be a rebound in commodity prices that suggests bottoms are now in place. And like those in Australia, US investors are selling out of other profitable sectors to fund the switch back into energy and materials. The high flyers in the US have been the FANG stocks (although that should now be FANA) – Facebook, Amazon, Netflix and Google (now called Alphabet). All these four saw significant selling last night.

Having rallied from its nadir at the bottom of the oil price, Wall Street is now back in what traders are suggesting is short-term overbought territory. The twin “big figures” of 17,000 in the Dow and 2000 in the S&P are providing a level at which to take a breather.

Commodities

West Texas crude is up US$1.94 or 5.4% at US$37.93/bbl. Brent is up US$2.06 or 5.3% at US$40.78/bbl.

Nickel and tin continued their rallies on the LME last night, with 1.5% and 2% gains respectively. Aluminium edged up another 0.7% as copper took a breather, while zinc just can’t seem to win any friends and fell 2%.

Iron ore is up 19%. No that’s not a typo. A US$10.20 gain puts spot at US$62.60/t.

The US dollar index is down 0.2% at 97.09 while gold remains relatively steady at US$1266.00/oz.

Today

The SPI Overnight closed up 36 points or 0.6%.

The NAB survey of local business confidence in February is due today.

China will release February trade numbers.

Several local stocks go ex-div today, including Oil Search ((OSH)).

Rudi will connect with Sky Business through Skype around 11.15am today to talk about broker ratings.
 

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