It was carnage in the commodity space as the roof fell in on the mining sector yesterday with the FTSE 350 Mining Index touching 10 year lows, while commodity prices fell across the board with losses for Copper, Aluminium, Platinum, iron ore as well as energy prices.
With iron ore prices and Oil prices both falling to multi year lows below $40 it is slowly becoming apparent that what appeared to be a little local difficulty has all the potential to be a perfect storm for the commodities complex.
Further evidence that Chinese demand, while showing some signs of picking up, is still set to remain on the weak side appears to have prompted a further dose of reality for mining companies and their supply chains as Anglo American (L:AAL) took an axe to its workforce and dividend, raising concerns of a domino effect throughout the industry.
It is slowly becoming apparent that the slide in commodity prices could well turn into a more prolonged slump and while in some respects that has a net benefit for consumers at one end it has a rather chilling effect at the other end in the context of highly leveraged basic resource stocks, as well as banks that have large lending exposures to the sector.
With no sign that OPEC is even leaning towards an agreement and the next meeting scheduled for mid-2016 it’s become a bar room brawl with Saudi Arabia and Iran the main protagonists with the rest of the cartel caught in the cross fire, while non OPEC members look on.
With price pressures set to remain weak, as Chinese factory gate prices declined 5.9% for the fourth month in succession relief from this disinflationary spiral looks some way off.
Commodity currencies haven’t fared much better with the Canadian dollar hitting an eleven year low, as the economy suffers from its exposure to weak commodity prices. Against this backdrop central bank Governor Stephen Poloz has raised the prospect of additional stimulus measures including the prospect of negative rates if required if the current currency weakness doesn’t prompt a recovery.
On the data front it’s a likely to be a fairly quiet day with the latest German trade data including the latest import and export data for October. Imports are expected to decline 1% while exports are expected to decline 0.6%, both worse than the corresponding September numbers.
Given the Volkswagen (DE:VOWG_p) scandal initially broke in the middle of September the October export numbers are likely to be of particular interest given that this will be the first full month when we get to see the full effect of the negative headlines on the export performance of the German economy, and its ripple out effects on “Brand Germany”.
EURUSD – last week’s daily and weekly reversal could well signal a turnaround for the euro with the low potentially in place. We need to hold above 1.0800 to avoid a retest of 1.0720 but ultimately could well be set for a move through 1.1000 on the way back towards 1.1120.
GBPUSD – yesterday’s brief drop below 1.4980 was unexpected but we managed to hold above 1.4940 before rebounding. A fall below 1.4880 would negate the prospect of a rebound back to the 1.5160 level. Above 1.5160 is needed for a return to the 1.5300 area.
EURGBP – we continue to push higher towards the 0.7300 area, which would be 61.8% retracement of the entire down move from the October peaks at 0.7495, and the November lows. We need to hold above the 0.7220 area for this to unfold.
USDJPY – currently finding support above the 122.20 area and resistance at the 124.00 area. Above the 124.00 area suggests the possibility of a move through to the August highs at 125.30. Only a move below the 121.80 area would delay the prospect of this scenario unfolding.
Equity market calls
FTSE100 is expected to open 17 points higher at 6,152
DAX is expected to open 5 points higher at 10,678
CAC40 is expected to open 4 points higher at 4,685
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