Light volumes allow larger moves

US markets up, European markets at a crossroads and industrial commodities and energy still in freefall  – our standard intraday November trading themes just continue.

Iron Ore
Source: Bloomberg

Now with the US on holidays for Thanksgiving - and it’s highly likely most investors will to take Friday off as well - global trade will be light over the next two days. Light volumes allow larger moves, so be aware of strange trading patterns.

However, the November macro themes remain unchanged and are likely to feed into December and early 2015. Issues to remain vigilant of:

  • Iron ore: Fourth consecutive day in red and a new five-year low at $68.49 a tonne. With no China white knight in sight, the freefall in price is likely to continue in the final five weeks of 2014. Talk out of Brazil last night suggests the mid-cap iron ore play Gerdau is considering putting 2015 export on ice, due to the mass oversupply in the market. Although Gerdau won’t have a bearing on the price, it’s the first sign the price squeeze is shaking out high cost supply. Chinese mines (typically high cost producers) are still operating despite history normally seeing them closing in the winter months as BHP Billiton, Rio Tinto Ltd and Vale continue to flood the market. The production war remains strong and will carry-on well into 2015.

 

  • OPEC: Again no agreement from Vienna and any form of coordinated cuts to production looks near impossible. The communiques are disjointed, contradictory and suggest individual nations are unable to agree internally - let alone as a bloc of nations. The risk for OPEC nations is that US shale, even at current prices, is economically viable. The fact it represents such a significant increase to potential supply, cutting supply to increase price just amplifies the viability of US shale.  Oil fell another 1% overnight – and with Saudi Arabia, Venezuela, Russia and Mexico failing in their negotiation, tonight’s Vienna announcement will be marginal at best.

 

  • Japan: With two weeks remaining in the snap election, Shinzo  Abe remains the likely winner. That’s despite recent surveys showing he only has 38% of the vote; his nearest rival has 9%. Elections see promise aplenty and the already announced ¥3 trillion is unlikely to be the only stimulus measure announced over the campaign. Personal consumption has not returned since the tax hike and inflation is well below the 2% target. The BoJ indirectly admitted on Monday it will never be able to exit its easing measures – 2015 is going to have a very 2014 feel.

 

Ahead of the Australian Open

The positives from the US just aren’t following through to the Australian market. The commodity slide is leading to nervousness around earnings, the state of the economy and the growth profile of the market.

The slide in earnings will also impact financials as well if business lending to mining corporate comes under pressure from sliding revenues. Banks (the darlings of the past four years) will also see selling as their lofty valuations are questioned. 

We are calling the ASX 200 unchanged this morning at 5396. November has seen the market giving back 2.6% which includes the banking dividends, so extracting these out means the market is only down marginally. If any of the three November themes improves over the come five weeks, Santa will come early.

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