Iron ore is the big story in the markets right now and while we saw iron ore futures trading down 4% yesterday, the 8% fall in the spot price has taken everyone back. Spot prices have made a lower low and some will be eyeing the $86.70 level seen last year as a possible target. Headlines that iron ore is in a bear market have been seen everywhere and the current fundamentals are not great for the commodity, with record inventories and falling steel prices.
Price action certainly favours being short FMG and from a sentiment perspective there isn’t the clarity to be long right now. When you see volumes at 116% above the 30-day volumes you know there is a fairly sizeable liquidation going on and if looking at longs it’s advisable to see stabilisation in the iron ore price, met with falling volumes in the stock.
Like FMG, sentiment towards this name is not great right now and as a result the buyers stand aside and the short-sellers push down prices fairly easily. Support is seen at 92c, where we saw a double bottom in January before a 30% move higher by mid-February. A break of 92c would suggest 80.5c as a target.
The current correlation between AUD/USD and the iron ore price is fairly low right now. Perhaps that’s because the AUD is seen less of a pure commodity currency, given the RBA’s push to move away from mining investment, in turn trying to stoke domestic demand. Still we have seen bouts where dramatic falls in the iron ore price cannot be ignored and we subsequently have seen the AUD react.
In February 2012 we saw the iron ore price fall from $159 p/t to $110 p/t and this was a key catalyst for the AUD/USD price to fall from 1.0550 to 0.9000. Still, it still seems logical that despite signs the domestic sector is responding, albeit slowly, the Australian economy still needs a weaker AUD and with its key terms of trade falling heavily the need for a weaker currency is increasing. NAB business confidence numbers are released at 11:30 AEDT.
Chinese equities are in freefall right now, and we are also seeing big falls in corporate bond markets. Valuations here have never been cheaper and are easily the lowest in the world. Still, no one wants to hold equity and as we know equities are a confidence game.
After-market we saw China’s credit numbers with new yuan loans coming out at RMB 644 billion, below market and a big drop from the January numbers. Aggregate financing was also well below expectations and after a big number in January it seems the PBOC are clamping down heavily on lending.