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Iron ore surge – bullish or warning signal?

Huge moves in the commodities space overnight have not translated well into the equities markets striking a note of caution that this current rally may be running out of steam.

Iron ore
Source: Bloomberg

The 19% jump in iron ore overnight – the biggest ever one-day increase – looks far more like a warning signal than a bullish market turn. There was little within the National Party Congress announcements that warranted such a move, nor was it replicated in Chinese equities. It more raises concerns about the ability for major Chinese hedgefunds to pile into relatively illiquid parts of the commodities market to make outsized gains, as we’ve seen time and again in the copper market over the past year. Nonetheless, these moves are all fairly positive for the Aussie dollar, commodity-related equities and the banks, and we are calling the ASX up 0.5% today. Fortescue had a stormer yesterday and has today announced a joint-venture with Vale alongside the purchase of a minority stake, while BHP’s ADR is pointing to a 5.1% open today, which all points to more positivity in the materials space.

It is lucky that the market cap weighting of the banks and materials are so high in the ASX, because the rest of the market has not been faring very well at all. Utilities, telcos, industrials, consumer discretionary and healthcare (in order of worst performers) have all seen declines over the past week. A lot of these stocks are impacted by the rise in the Aussie dollar.

The Aussie dollar is not far from the US$0.7500 level, but it seems unlikely to continue at these levels. Particularly, with the an upcoming Fed meeting on 16 March, there is a high likelihood that the big improvement in US data warrants a far more hawkish statement from the Fed putting rate hikes back on the table and seeing a corresponding strengthening of the US dollar. Such a scenario is likely to drive a pullback in commodity prices and the Aussie Dollar.

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