The Overnight Report: Turkey Sparks Commodity Snap-Back

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By Greg Peel

The Dow closed up 19 points or 0.1% while the S&P rose 0.1% to 2089 and the Nasdaq closed flat.

Profit-Taking

Big falls in metal prices on Monday night did have the feel of a capitulation trade of sorts, with copper heading back to 2009 levels and nickel all the way to 2002 levels. Metals traders have been getting shorter and shorter, setting the market up for a potential short-covering scramble on some small trigger.

Which is exactly what happened last night, although it’s all very well to justify with hindsight. But as far as yesterday’s trade on the local market was concerned, the materials sector was always going to lead the index lower, which it did from the opening bell.

The ASX200 opened down 45 points, but the buyers were waiting. By 11.30am the index was down only 10 points and it looked for all the world like a sixth consecutive day of gains might be booked despite last week’s very sharp rally. It wasn’t to be nevertheless, and by afternoon the profit-takers won out. All sectors finished in the red, led by materials (-1.8%) but aided and abetted by the consumer sectors which responded to the weak weekly consumer confidence numbers.

Under normal circumstances one would suggest such a profit-taking session after a strong run of up-days is text book stuff, and unsurprising ahead of what on Wall Street effectively becomes a four and half day weekend, beginning from lunchtime tonight in New York. But the shooting down of a Russian fighter by Turkey overnight has changed the mood.

The Putin Factor

The lack of any particular fear-based response from financial markets to last week’s Paris attacks confirmed the assumption that markets no longer panic at such times, given history shows initial fear-based sell-offs are invariably followed by sharp rallies. We have also this year seen an unwinding of any geopolitical premium in oil prices, given the Middle East story is just one that rolls on and on without end. But when it comes to Russia, things are a little different.

Commentary out of US markets last night concurred that the shooting down of a fighter plane would not otherwise cause high level market angst but when it’s one of Vladimir Putin’s planes, there is some concern. Putin is seen as being volatile and unpredictable. Thus for oil markets, it was a day to buy, helping to support US stock indices.

US economic data releases on the day were mixed. The first revision of US September quarter GDP took growth up to 2.1% from an initial 1.5% estimate when 1.9% had been forecast. There is nothing here to derail a December Fed rate hike.

But consumer confidence, as measured monthly by the Conference Board, came as somewhat of a shock. Economists had expected the index to reach 100 in November – the crossover point into optimism – from October’s 99.1. Instead, the index plunged to 90.4.

This is not the news US retailers want to hear heading into this week’s “Black Friday” sales, the biggest shopping day on the US calendar for bricks & mortar outlets, and “Cyber Monday”, ditto for online.

The US dollar index, which had rallied strongly the last two sessions, fell 0.2% to 99.58. US stocks initially opened lower but struggled back to a relatively flat close, helped by the resource sectors.

Commodities

As noted, oil prices rose last night on the geopolitical factor. West Texas is up US$1.06 or 2.5% at US$42.94/bbl and Brent is up US$1.21 or 2.7% at US$46.20/bbl. But the big moves were in base metals.

The US dollar was lower, providing an excuse. US economic data were mixed, but an overall beat on GDP provided some incentive. The overriding factor nevertheless is that LME traders had gotten themselves very short. The fighter plane news was just the trigger required for a mad short-covering scramble, one in which those who are not short just stand aside.

Aluminium closed up 1.5%. Lead up 2.2%. Zinc jumped back 3.2% and copper 3.5%. And nickel, the most beaten-down of all, leapt 7%. Tin was the only wood duck, unchanged on the day.

Such snap-back rallies are part and parcel of trading in volatile commodities markets and by no means suggest any sudden change of fortune ahead for miners. They can, nonetheless, provide an indication of what low level of price represents an “oversold” market. Analysts have been looking for metals prices to bottom out, but they have just kept falling. Maybe now we have found some sort of line in the sand.

Unfortunately we can’t say the same yet for iron ore. There is not a lot of correlation between Russian warplanes and Chinese steel production. Iron ore is down another US80c at US$43.40/t.

Gold used to be the go-to safe haven at such times but that is no longer the case. Gold did rally US$7.40 to US$1074.80/oz but it’s hardly panic stuff and can be justified by the weaker greenback.

The Aussie is up 0.8% to US$0.7246. Part of that move represents the lower greenback, but the bulk came as a result of RBA governor Glenn Steven’s speech last night to a business economists forecasting conference dinner – inevitably a riotous affair. Stevens was asked whether the RBA’s decision not to cut on Cup Day was because the economy is picking up or because another cut would hurt retiree incomes. “You are making the case to stay still,” said Stevens. “It is an idea I happen to agree with”.

Today

The SPI Overnight closed up 23 points or 0.4%.

The countdown to Australia’s GDP result next week begins in earnest today with September quarter construction work done data.

Tonight in the US sees a barrage of morning data releases, including durable goods, new home sales, FHFA house prices, personal income & spending and a flash estimate of November services PMI. Then by lunchtime it’s planes, trains and automobiles, as Wall Street rapidly deserts ahead of Thanksgiving. The NYSE remains open but it is a half-day in anyone’s books.

There’s yet another welter of AGMs today locally as the season finally begins to draw to a close. Aristocrat Leisure ((ALL)) will release its full-year result.
 

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