Crashing back, commodities routed

Commodities were once again the biggest talking point in trade overnight.

Source: Bloomberg

Currently the complex as a whole is trading at its lowest levels in over 15 years. Looking at the XME ETF, it’s the most bearish chart you could draw. 45 degree angle from top left corner to bottom right with almost no interruption in this linear path – it’s as bearish as bearish can be and should be traded as such.

Looking at the Bloomberg metals complex or the CME or LME baskets, they all tell the same story – the ‘cyclical’ bear trend is coming to its height and is far from over.

I would also say this: the charts may suggest that the RSI is under 20 (oversold) and the stochastics and several other technical indicators show all the signs of being oversold. However, Chinese steel mills are not looking at these as a reason to buy iron ore, nor are big consumers of oil and copper seeing this as a reason to buy either – this does appear to be a price trap as the fundamentals scream sell and will follow the trend.

What’s catching my attention

Copper is now at its lowest levels since June 2009 and the red metal has now fallen for five consecutive days. The concern here is for a BHP, which has a higher correlation to the copper price than any other of its four pillar commodities interestingly. BHP’s ADR is calling the Big Aussie down 3.45% to $19.67 on the open this morning as it continues to follow the copper price.

Iron ore fell 4.5% for delivery into Qingdao to US$45.58 a tonne in Singapore last night. It is now within 90 cents of the year’s low US$44.59 a tonne. This puts all bar the three big iron ore miners underwater of the ratio ‘n the price to C1 cost’.

Brent is fast becoming the most interesting oil contract, falling 2% overnight to its lowest level in over four years on the active contract. Brent is the oil contract that drives Asia and the consumer positive impact aside on cheaper petrol Brent sub US$45 a barrel makes internal rates of return for Asian oil and gas project sub 8%, which is sub-optimal and sub-investment grade. Brent is down 23.83% year-to-date and is the worst performing major contract in the energies complex.

Gold is also not seeing its normal ‘safe-haven’ buying in this market. It lost a further 1% to be down 9.54% for the year. The buying of US treasuries and JPY is clearly more attractive for safe haven monies than gold currently as the fundamentals in each well outweigh the inert metal.

Ahead of the Australian Open  

The RBA minutes yesterday were as neutral as neutral can get, although the clear easing bias from the statement was still included as it pointed out forecasted earnings beginning downgraded, a tightening in financial conditions and a benign inflation outlook.

However, like September, the October minutes clearly point out ‘that the prospects for an improvement in economic conditions had firmed over recent months’ and confidence in the economy is growing. The ASX is still to register this as the revenue growth in major Australian firms is still to be seen, however the conclusion from the minutes is one of cuts being off the table for the foreseeable future. It puts a floor in the AUD and a slight negative favour to equities.

Ahead of the open, we are calling the ASX down 27 points to 5090.

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