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Commodities drive Asia

Commodities have been the driving force behind gains in Asia today with commodity stocks and related currencies enjoying a day in the sun.

Asian markets
Source: Bloomberg

The ASX 200 has managed to dig itself out of the hole it’s been in all week and is actually now eyeing a weekly gain after having spent most of the week in the red.  While iron ore has rebounded significantly this week, there will still be plenty of questions around how sustainable the move is.

BHP’s move to defer spending on its iron ore division triggered the rally and, given iron ore concerns were skewed to the supply side, this has encouraged analysts. However, I would caution against calling a bottom in the commodity as the demand picture remains uncertain while supply remains consistent (and in some cases is ramping up).

The last big slump in iron ore was greeted by a raft of broker downgrades, which coincided with an iron ore recovery. Given the recovery has been greeted by analysts calling a bottom this time round, I would be wary about aggressively positioning for a sustained recovery.

Regardless, iron ore futures maintained their run in Asian trade and the commodity is set for a rise of nearly 8% for the week. In response, the pure plays are rallying significantly with FMG extending its gains from yesterday while BHP and RIO are also firmer.

Short interest in FMG has also dropped below 10% from well over 20%. As a result, the short squeeze is likely to see the run last a little longer. Having said that, yield plays have been the pinnacle of the market for a while now and rate cut expectations will remain a key theme next week.

At the same time we have bank earnings on the radar; any disappointment will result in some profit taking in this yield-hungry environment.

The numbers don’t add up for Greece

Oil has been the other big story this week and energy stocks around the region have responded favourably. A concern for some of these commodities is the fact manufacturing activity showed signs of strain, which tends to be a negative for global activity and demand. However, we’ll have to assess the situation for another few months to see if this will be a trend or a one-off.

Disappointing manufacturing figures hurt European equities yesterday but focus today will be firmly on Greece. There will be a Eurogroup meeting in Riga and, while all the recent commentary around Greece has shown constructive signs, it’s hard to rule out fresh volatility on that front.

The reality is no matter how positive commentary is, the numbers just don’t add up and something’s got to give at some point. All we have are key dates to look out for and, apart from that, no one really knows how this will all play out.

Recovery for Europe

Ahead of the European open, we are calling the major bourses firmer with optimism around Greece and favourable leads from the US likely to drive an early rise. On the calendar we have the German Ifo business climate and it’ll be interesting to see if data can redeem itself after yesterday’s disappointment.

In US trade focus will be on whether equities can maintain the momentum we saw in yesterday’s trade. With the S&P and Nasdaq having traded at record highs through the session, investors are likely to be looking to buy the dips as confidence slowly returns.

Durable goods orders will be the most notable release and on the earnings front we have around 12 companies reporting. Investors will be keen to see if we can continue to get good momentum in earnings.

Oil prices will also be key – particularly for Canada where the rebound in oil prices drove Canadian Dollar gains.

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