Mind the equities-commodities-AUD gap

Big moves occurred in North American trade on the back of mass moves in oil, which will also descend on Asia today.

Source: Bloomberg

Volumes are staggering and the reinstating of shorts in WTI is within six million barrels of the record level of the year and history.

Black gold no more?

WTI fell 5.7% to US$37.69 a barrel to go with the 4.7% decline after the OPEC summit over the weekend.

Brent lost 4.76% to US$40.69 a barrel on top of a 3.7% decline from the weekend.

Hedge fund short positions in WTI as of 1 December hit 172 million barrels – the third largest position on record. This positioning is before the OPEC meeting and having seen a slight rally last Thursday as well as the trade in oil over the past three days, one would expect a new record has been set as the bears set upon the oil trade.

 Mind the Gap

The gap between the AUD-commodities-equities is at its largest point of 2015 – the break out to the upside in the AUD and the ASX compared to the commodities indices is stark.

The gap between the ASX and commodities has been built on the back of the moves in the financial services space, which now encompasses 48.7% of the ASX, with the banking sector making up 30.2% of the ASX. The materials space makes up 12.1% and energy is at 4.5% – it is clearly no longer a commodities index.

However, the majority of the big ticket commercial transactions in Australia are still commodities-focused. I have been keenly watching the corporate component of the banks’ bad and doubtful debt (BDD) line which has shown signs of moving off the bottom of the cycle in 2015. Further signs of upticks in corporate BDD from the banks in 2016 will see the gap closing as the financial space gets caught up in the price collapse.    

The AUD is also lagging behind other commodity-based currencies. USD/CAD is breaking out beautifully to the downside on the oil breakdown – the reinstated long positions in the USD has taken hold and WTI is driving the CAD back towards the lows of the year. It’s even stronger in NOK, however the trade here isn’t as compelling on funding measures.

No doubt, the AUD lag has a central bank factor. Expectations of possible further cuts in 2016 have been pushed out to mid-to-late 2016 with June being the first month next year to see a probability of a rate cut in the interbank markets above 50%.

But Australia’s terms of trade is dominated by commodity exports and the gap will have to close as central bank differentials filter out and currency fundamentals come back into play – the gap will close here too.

Ahead of the Australian Open  

We are calling the ASX down 33 points to 5122. Iron ore hit another decade low and has entered the US$30 handle for the first time in history for delivery into Qingdao trading at US$39.06 a tonne. BHP’s ADR was off 2.8% to $17.49, having lost a further 1.7% in London. The banks will also see some pressure today, however not on the same level at the materials space, with CBA’s ADR off 0.4% to $80.21.

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