The Overnight Report: Commodity Carnage

This story features BHP GROUP LIMITED. For more info SHARE ANALYSIS: BHP

By Greg Peel

Hang on to your hats. The commodity sell-off that’s been threatening all week hit in earnest last night as a stronger US dollar turned the cracks in the dam wall into a serious breach. Non-financial world hysteria is always a good sign of a short term top, and if you had a dollar for every time the word “oil” was mentioned in the media, in parliament, at the water cooler, and in cabs this week you could retire.

On the strength of this week’s movements in the ASX 200 index – almost entirely correlated to oil price movements and uncorrelated to the US stock market – one would have to expect a down-day today, perhaps provided no more foreign companies decide to buy an Australian gas asset. The SPI Overnight is showing a mere down 14 points, but then the SPIO’s predictive power has been sadly lacking in recent sessions.

Early in the session, the oil price rallied nearly US$2 to US$132.90/bbl on news of a very big drop in crude inventories. This was the biggest weekly drop since 2004, and belied belief that recent high prices would prove demand-destructive. However, it was quickly revealed that the reason for the drop was a delay last week in tanker off-loads in the Gulf of Mexico – a delay that would mean inventory positions would reverse this week. In other words, it was an anomaly. Oil turned on a dime, and headed south.

By the time oil had crossed back over the unchanged line London was beginning to close, such that the share price move in BHP Billiton ((BHP)) on the LSE was negligible. But the fall in the oil price gained momentum, fuelled by a rising US dollar. The US dollar was rising because the first quarter US GDP number was revised to an annualised growth of 0.9% last night, up from last month’s initial estimate of 0.6%.

This sounds like a big difference, but the truth is this is exactly the number economists were expecting. It doesn’t mean recession fears are unfounded, as so far predictions for the second quarter GDP are for a fall of 0.4%. But a year-on-year GDP growth of 2.5% still looks a lot healthier than some might have expected, even if you consider that defence spending is a significant contributor. Despite in-line result, the US dollar went for a bit of a run.

That was all oil needed. The pent up speculative pressure needed a release valve, and the dollar was it. Notably, oil has rallied toward US$135 even as the US dollar has strengthened and weekly inventories have shown builds. But last night it was back to the script. Oil ultimately fell over US$6 from the high, or US$4.41 from yesterday’s close to finish at US$126.62/bbl. On the NYSE, BHP shares fell over 3%.

Gold had threatened to fall yesterday on a stronger greenback, but a turnaround in the oil price halted the slide. There was no holding back last night however as gold fell US$23.60 to US$877.40/oz.

It was a very bad session for base metals prices in London. It made no difference this time that the US economic data of the day were positive. Aside from the rising US dollar, more evidence of building inventories in nearly all metals was enough to finally break prices out of recent trading ranges. The biggest victim was recent market darling, and blue-sky test pilot, tin. It fell 11%.

While the official LME closing prices show substantial weakness the carnage continued into the late market, coinciding with trade in New York. Nickel fell 7%, zinc fell 7%, lead fell 4%, aluminium fell 3% and copper fell 2.5%.

With the jump in the US dollar the Aussie fell US0.7c to US$0.9561.

Do we need to know anything more? Oh yes – the stock market. The Dow rose 52 points or 0.4% while the S&P added 0.5% and the Nasdaq 0.9%. The weaker oil price was a general impetus while tech stocks in particular were heartened by confirmation of the better GDP number.

There was also a bit of a bounce- back in financials, aided somewhat by the GDP, but the real stimuli were more specific. Mastercard announced it is expecting to still post double-digit growth in the second quarter as US credit card usage fails to respond to tighter financial conditions. Death or glory perhaps for the US consumer?

Bear Stearns shareholders took a whole 15 minutes to approve of the JP Morgan takeover, and thus the curtain closed on 85 years. Shares in basket-case mortgage lender Countrywide jumped 8% as its board set a July date for the shareholder meeting to approve Countrywide’s sale to Bank of America. It was a generally positive day after a bad week for financials, and perhaps that might suggest a sector for Australians to park their extracted material stock funds in today.

There was mixed news on the retail front, as department store Sears warned of hard times ahead while a late-season first quarter earnings report from Dell computers saw its shares surge 7% in the aftermarket. Dell should provide a positive lead in for Wall Street tonight, but tonight marks the end of the investment banking quarter so related funds flows could mean anything can happen and probably will.

It is also the close of the month for Australian fund managers, but at the risk of being shown up for a fool I’d have to say down 14 on the SPIO looks a bit underdone.

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