Christmas coloured screens in commodities

Tough times to be a commodities trader; overnight trade saw silver move through a 15% range and gold through a 6% range.

Source: Bloomberg

Brent Crude moved near enough to 7%, while copper moved through a 4% range. A look at the commodities boards suggested Christmas festivities had come early, as each moved from negative to positive and vice-versa.

The last 24 hours of trade tells me three things: volatility is coming, the longer term fundamentals are to the downside and companies with exposure to the underlying commodities are in for plenty of trade action in 2015.

While oversold technical levels kicked in on the trading of commodities and no doubt will filter through to Asia trade today (the RSI in the energy space are at record lows) we need to ask; are we watching a dead cat or the beginning of a sustained rally? Unfortunately, I see last night as a pause in the commodity market reweighing that has been underway since September.

OPEC’s decision to detox in the rebalancing of the oil market is just the beginning of what is likely to be a lower for longer scenario in the world oil price. Barring the rally seen last night, the three month decline in oil is the worst collapse in the price since 2008. The impact this will have on producing nations is expected to be dire.

It's been suggested that the decline in oil could have the same financial impacts that lead to the Mexican debt crisis 30 years ago and the collapse of the Soviet Union. Russia will be the one to watch next year. Estimates have Russia losing US$140 billion every year on current estimates. $40 to $50 billion of this is likely to come from the US-European led sanctions. It also stands to lose a staggering $90 to $100 billion in lost oil royalties because of the price decline. We have seen Moscow flexing its might in 2014. I’m asking myself whether  backing itself into a corner under the crippling financial strain will see it come to the negotiation table or will it ‘rage against the machine’ to get itself out?

Commodities will be a huge influence on trade in 2015; global growth, global wealth and global sentiment will be driven by what happens in this space. OPEC, China, emerging nations and commodity-rich developed nations will have an interesting time navigating what appears to be a murky 2015 outlook.

 Ahead of the Australian open

All of this brings today’s Reserve Bank Australia meeting into very sharp focus. There will be no move on rates, that is a given. However, if there is no change in the outlook from the bank I would be surprised and slightly concerned.

With bear markets in iron ore and oil, wage growth flat lining, corporate profits falling and confidence sliding there’s a sustained pressure on living standards. This pressure is combined with housing data which shows very clearly the heat from the beginning of the year is coming out. This would be conducive for a dovish RBA statement. However, I think the status quo will be maintained somehow, which means we will have to wait until February to understand how the RBA views the Australian economy in 2015.  

Based on the moves in the futures markets overnight, we are calling the ASX 200 up 11 points to 5219 – a long way from the breakeven point of 2014. However BHP's ADR is suggesting a massive snap back in the major miner having fallen to its lowest level since March 2008, yesterday. To think it was at $39.23 in August, meaning it’s lost over $10 in value or 25.5% since the August high. Energy plays are also likely to see strong gain, having been savaged in the past two trading days. The tough trading conditions are likely to remain.  


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