The Overnight Report: Commodity Bubble Bursts

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By Greg Peel

The Dow closed up 23 points or 0.1% while the S&P rose 0.1% to 2204 and the Nasdaq gained 0.2%.

Communication Failure

Having finally pulled back from the Trump euphoria highs on Monday, yesterday the local market went into consolidation mode. A lacklustre session suggested traders are not prepared to go out on a limb ahead of the week’s big events, being the OPEC meeting tonight and the Italian referendum on Sunday.

There was one stand-out sector move on the day nonetheless, being telcos. It was not about sector gorilla Telstra, but about the once high-flying Vocus Communications ((VOC)), which ran up 50% from August last year to June this year and has since plummeted to well below the August 2015 price. Vocus had already fallen a long way since August 2016 and yesterday dropped 24% following the company’s AGM.

The initial plunge from August had been triggered by a profit warning and big plunge for peer TPG Telecom ((TPM)). Yesterday the boot was on the other foot, with TPG dropping 7% in sympathy. The telco sector as a whole fell 1.5% in an otherwise unremarkable session.

Perhaps worthy of remark, nevertheless, was a 0.6% fall in energy and a 0.9% fall in materials despite oil, iron ore and base metal prices rising overnight. I did say “ring the bell” yesterday when iron ore hit US$80/t. Well, I was right. Iron ore futures began falling in yesterday’s session and the spot price has plunged 6% overnight.

The sellers were ahead of the game, moving in on the big miners yesterday. The oil price had ticked up but the signs of an OPEC deal being reached have begun to turn, hence nervousness likely explains a retreat from oil & gas stocks.

Last night saw a wholesale sell-off in commodity prices, with the exception, funnily enough, of thermal coal. It was steady, but a 5 point gain for the SPI futures overnight appears stoic ahead of what should be further falls in the resources sector today.

Holding Firm

It would not have been a surprise to see Wall Street down meaningfully last night on the assumption Monday night’s apparent post-Trump rollover from all-time highs might have gained some traction last night as slow movers jumped in to lock in profits. Indeed, the US indices did open lower but they were quick to recover.

For once it was not about politics, central banks or oil cartels. It was all about actual economic data.

The first revision of the US September quarter GDP saw a rise to 3.2% from 2.9% when 3.0% was expected. The consumer spending growth component of the measure was revised up to 2.8% from a prior 2.1% to mark the fastest pace since 2002.

On the subject of US consumers, I suggested yesterday last night’s Conference Board monthly consumer confidence survey would be interesting, being the first post-election. Well despite Trump losing the popular vote, the confidence index surged to 107.1 from 100.8 in October to mark its highest level since July 2007, which was just before the global wheels fell off.

On the subject of those wheels beginning to fall off in 2007, last night saw the Case-Shiller 20-city house price index for October hit an all-time high. Yes, that means house prices in America’s biggest cities are now higher than they were in 2006 – the peak of the housing bubble that ultimately brought the world undone.

Should we be thrilled or very afraid? Thrilled seems to be the go for now. While Wall Street closed only mildly higher last night, the fact the selling did not continue after Monday’s dip was a positive sign.

Oil remains a concern, however.

Commodities

The OPEC oil ministers are already in Vienna ahead of tonight’s official meeting. The ministers are running to and fro holding pre-meeting meetings as they try to negotiate some sort of deal. Right now, the sign are not good. Iran, for one, will stand firm on its desire to return to pre-sanction production levels.

Which puts an OPEC-wide cut in doubt. But also in doubt is a pure binary outcome – production cut or no production cut. With US$45/bbl for WTI the pivot point between the outcomes, 55 and 35 are seen as the two price point possibilities. However there are possibilities in between – production freeze instead of cut, a cut of less than the one million barrels per day hoped for, a cut but with exemptions — who knows? Anything could happen tonight and probably will.

Oil traders have decided to sit on the pivot point. West Texas crude is down US$1.56 or 3% at US$45.31/bbl.

The rallies we have seen these past months in bulk and base metal prices has been to a large part justifiably driven by supply-side constraints meeting better than expected demand. But the rallies we have seen in the last couple of weeks have, despite efforts to the contrary from Beijing, been driven by pure speculation. Speculative bubbles, particularly in commodities, inevitable burst.

Base metal prices began to roll over in Shanghai and the selling gained momentum as trading opened on the London Metals Exchange. On the LME, aluminium closed down 1.5% last night, copper 2.8%, nickel 4.7%, zinc 5.9% and lead 6.7%.

On the Singapore exchange, spot iron ore fell US$5.10 or 6.4% to US$75.10/t.

There was no currency effect – the US dollar index fell 0.4% to 100.98.

That fall did not manage to inspire gold, which has dropped back US$3.30 to US$1189.00/oz.

The Aussie is relatively steady at US$0.7482, trading off the US dollar dip against commodity price falls.

The good news is despite some rather spectacular price falls last night, they really only represent a blow-off from the sharp run-up over the past week in particular. It is not the end of the world.

Today

The SPI Overnight closed up 5 points.

Today sees local data for monthly building approvals and quarterly private sector capex.

A load of data releases in the US tonight includes personal income & spending, the Fed Beige Book and private sector jobs numbers.

The local session will also see earnings reports from Aristocrat Leisure ((ALL)), Collins Foods ((CKF)), Freelancer ((FLN)), SAI Global ((SAI)), SMS Management & Technology ((SMX)) and Touchcorp ((TCH)). Medibank Private ((MPL)) will host an investor day and there is a rush of last minutes AGMs to round out the month.

Tonight, all eyes will be on Vienna.
 

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