Risk snap back

Risk snapped out of the worst trading week since mid-August last night – not surprising considering the amount of downside that was being priced in.

Source: Bloomberg

What’s catching my attention

WTI is now at that inflection point – the call was that the supply/demand equations would start to equalise and even swing towards the demand side at US$40/barrel. Trading overnight was probably affected by the French action taken in Syria, however intraday volatility suggests it is reaching that equilibrium point.

Raw material plays in the Canada and the States had some of their best trading day in over five weeks last night, on the back of the moves in oil. BHP’s ADR is suggesting it will hold at the current levels today and might even add 0.3% while energy firms are set for strength. What’s interesting in BHP’s trading is each time it has crossed into the ‘teen’ handle it has been bid up strongly, and is yet to close under $20. This level looks like the handle and the bulls will defend with gusto.

However, copper prices tell another story. Unlike its volatile black liquid cousin, the red metal continues to free fall. A further 2.2% decline in London and in the States show how much concern there is globally around growth in emerging markets and particularly China. Material stocks might have a bounce today, however the underlying material fundamentals remain concern.

The underperformance of commodity intensive indices is rapidly increasing. For example, comparing the likes of the FTSE 100, TSX and the ASX to the S&P shows a clear breakout of the more diverse US market. The fact that oil, iron ore and copper are welded in bear markets does not help the underlying fundamentals of the other three. But the break is clear, the question is – will they leg back up?

To answer this, the weight breakdowns of the three resource rich indices should be examined. The TSX underperformance is understandable considering 19.2% of the index is exposed to energy compared to the FTSE at 12.6% and the ASX at 4.6%. The oil price has seen the Canadians in the bottom three indexes of the developed world. If the demand level pushes WTI back towards US$50 or even US$55 a barrel, the TSX should gap up.

On the flip-side, the material exposure is where the ASX breaks down, with 13.2% of the index made up by material firms in comparison to 9.5% on the TSX and 6% on the FTSE. If copper, coal and iron ore continue to create earnings holes in the estimated ASX material firms, the ASX will join (or even replace) the TSX in the bottom three.

Ahead of the Australian Open  

The Reserve Bank of Australia (RBA) minutes are released today, and in all honesty they are almost obsolete considering it will not have factored in the October jobs numbers that have seen even the most bearish of economists changing their views around rates.

If 2% is the cyclical low of the current cycle, the minutes will want to point to a few other parts of the economy (not just jobs) to justify its current policy stance. Business confidence was the September reasoning, October is likely to be centred on consumer sentiment, which is back at two-year highs (depending on which survey you follow). The board is also likely to be pleased that the froth in the Sydney and Melbourne housing markets is beginning to dissolve while construction remains at a steady pace, which is positively impacting earnings.

The AUD is unlikely to shift dramatically at 11:30am AEDT. However, the ‘more neutral’ the minutes, the higher the local unit will shift as the slight glimmer of a cut in 2016 diminishes even more so.

Ahead of the open, we are calling the ASX up 42 points to 5045.

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