The Overnight Report: BHP Sneezes, Wall Street Catches A Cold

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By Greg Peel

The Dow closed down 68 points or 0.5% while the S&P lost 0.3% to 1405 and the Nasdaq dropped 0.1%.

It was a fairly offhand remark, made to reporters by BHP Billiton's ((BHP)) head of iron ore Ian Ashby, as he attended the Global Iron Ore & Steel conference in Perth yesterday. Ashby suggested that China's iron ore demand growth appeared to be flattening and would likely slip from double digit percentages to single digits soon, if it hadn't already.

The Australian stock market shrugged. The ASX 200 closed down 15 points but had begun the day feeling a bit weak and a 0.3% drop is hardly the stuff of major corrections. Asian markets also responded negatively, but it was up to Wall Street to react with a touch of panic. From the opening bell, the Dow fell 115 points, and all anyone could talk about was BHP (as well as Australia's new mining tax).

It's somewhat strange that despite Beijing's long stated and well known intentions to slow Chinese economic growth to a more manageable pace, every time there is a suggestion of a Chinese slowdown markets react as if it were shock news. It happened recently when Beijing declared its 2012 GDP growth target to be 7.5%, down from 8.0%, despite most world economists having adjusted their forecasts down to such levels months ago. It happens every time there is a slight turn down in China's manufacturing PMI, despite China's biggest export customer being a recession-bound Europe. And now it's happened on a suggestion that the frantic pace of Chinese iron ore demand growth is starting to ease.

Note that we are talking demand growth, not demand. After years of demand growth running at double digit percentages, and over 20% for a while, a deliberately slowing China is seeing that demand growth ease back to single digits. Demand itself will thus still grow, and still be enormous. BHP is very confident about the Chinese steel industry going forward and has no intention of altering its Pilbara expansion plans. Nor does the world's biggest iron ore exporter, Rio Tinto ((RIO)), and clearly Fortescue Metals' ((FMG)) recent large debt issue is indicative of that company's sales forecasts.

The Dow was only briefly down double digits last night before the buyers stepped in, smelling bargains. Wall Street has posted gains in nine of the last ten sessions and realistically last night's open felt a bit like an excuse to take some profits. There are many on Wall Street who have become quite bullish of late, but there are still many shaking their heads and wondering what new negative macro news might be on the horizon. And for the first time post the GFC recession, forecasts suggest the upcoming US corporate earnings season could show net negative growth.

Oil markets responded negatively to the BHP comments as well, but weakness was further aided by talk from a Saudi official. Ali Al-Naimi suggested last night that the oil price was too high, that it is very unlikely the Straits of Hormuz would ever be blocked, and that Saudi Arabia's oil supplies were plentiful. Mind you, the world's largest producer always makes such comments when the oil price rises to levels OPEC fears may affect demand destruction. Yet Saudi Arabia will never let anyone in to check on those plentiful supplies for themselves.

China was also in the headlines last night with respect to oil, with Beijing raising state-subsidised gasoline and diesel prices by 6-7%. Brent crude fell US$1.59 to US$124.12/bbl and West Texas fell US$2.41 to US$105.68/bbl.

Perhaps the biggest victim of Mr Ashby's comments was the Aussie dollar, which is down a full 1.2% over 24 hours to US$1.0480. This is actually good news for us locals, if only the Aussie doesn't recover that ground soon which it probably will. The US dollar index rose 0.2%, and gold had another drop, falling US$14.30 to US$1649.10/oz. Technical analysts are beginning to be concerned gold is looking to test significant support.

Base metals other than nickel mostly fell 1-2% while lead fell over 3%.

And the local market remains fairly sanguine about the whole BHP affair, with the SPI Overnight down only 9 points or 0.2%.

The local market will later hold its breath as David Jones ((DJS)) reports, along with retailers Kathmandu ((KMD)) and Oroton ((ORL)) and resource stocks Alacer Gold ((AQG)) and Aurora Oil & Gas ((AUT)).

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