Home Commodities The Overnight Report: Commodity Crunch

The Overnight Report: Commodity Crunch


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This story features REGIS RESOURCES LIMITED, and other companies. For more info SHARE ANALYSIS: RRL

World Overnight
SPI Overnight 6477.00 – 64.00 – 0.98%
S&P ASX 200 6629.30 + 16.70 0.25%
S&P500 3831.39 + 6.06 0.16%
Nasdaq Comp 11322.24 + 194.39 1.75%
DJIA 30967.82 – 129.44 – 0.42%
S&P500 VIX 27.54 + 0.01 0.04%
US 10-year yield 2.81 – 0.08 – 2.77%
USD Index 106.54 + 1.36 1.29%
FTSE100 7025.47 – 207.18 – 2.86%
DAX30 12401.20 – 372.18 – 2.91%

By Greg Peel

As Expected

The local market did very little yesterday on low school holiday volume up to the RBA announcement at 2.30pm, at which point the ASX200 was up 7 points. I suggested yesterday the decision offered a binary risk with limited downside, and when a 50 points hike was confirmed the index shot up 45 points – in stark contrast to the reaction to the June hike.

But it could not hold on in the last hour, and a further -12 points drop in market-on-close selling further took the wind out.

“The Board expects to take further steps in the process of normalising monetary conditions in Australia over the months ahead. The size and timing of future interest rate increases will be guided by the incoming data and the Board’s assessment of the outlook for inflation and the labour market. The Board is committed to doing what is necessary to ensure that inflation in Australia returns to target over time.”

This repeated paragraph from the RBA statement has economists continuing to believe one more 50-pointer will come in August before the board slows down.

And that slowdown will be more likely if inflation eases more rapidly than it has to date. The June quarter CPI result will still show a solid jump over the March quarter, but from mid-June through to last night, commodity prices have been swiftly retreating on global recession fears.

Last night WTI crude fell -10% to below US$100/bbl, copper fell -3.5% and gold dropped forty dollars. Iron ore, thankfully, went the other way yesterday, but today may be different. The futures are suggesting a -64 points fall for the index this morning.

So we can rather dismiss the best performing sector yesterday, being energy (+2.2%).

Healthcare rose 1.2% and appears now to be enjoying the currency tailwind while technology gained 1.7% and will likely do it again, and more, today on last night’s Nasdaq rebound.

In the other direction, real estate fell -1.3% on the rate rise after having rebounded in recent sessions.

Remaining sectors posted only minor moves in either direction, the most notable in the circumstances being financials (-0.1%), for which rate hikes and prospective margin increases are outweighed by an expected drop in loan demand and likely increase in loan losses. For insurers within the sector, things are a bit damp.

Materials gained 0.2% but will look different today. Yesterday gold miner Regis Resources ((RRL)) jumped 10.7% on a solid production report and peer St Barbara ((SBM)) chimed in with 8.5%.

Not today.


Coming much more into focus now on Wall Street is the surging US dollar, given the number of big US multinationals. Those companies with European exposure are most vulnerable to the collapsing euro, which last night fell -1.7% to its lowest level in twenty years as it approaches parity with the US dollar. The US dollar index rose 1.3% to its highest level in twenty years.

It’s a case of the relativity of the evils – the debate continues as to whether the US will go into recession but there is little doubt Europe will. One commodity price not to have fallen along with everything else on recession fears is European natural gas, which continues to trade at a massive premium to US domestic and Asian-traded gas. Right now, Europe is lucky it’s summer.

US bond yields fell again last night and at one point the two-year yield was trading above the ten-year before the two settled out around parity.

Any issues of supply problems in Libya and strikes in Norway were forgotten when the oil markets simply caved in. But of course, while that’s bad news for energy producers, it’s good for everyone else.

Falling commodity prices are one reason why many argue the US won’t fall into recession. If inflation is dropping back rapidly on demand destruction, an aggressive Fed may find itself (will find itself according to many) needing to ease back or even reverse its rapid rate hike agenda.

That is good news for US growth stocks. US yields have already taken about -60 basis points out of their earlier assumptions for peak US rates and if the Fed does need to slow, that will be confirmed. Given many US tech stocks have been so beaten down, some -50-80%, last night investors decided the bottom is in, at least for relevant names.

All three major indices fell heavily on the open last night, with the Dow dropping to down -740. Then came the turnaround, led by the Nasdaq. By the closing bell the Nasdaq was up 1.8%, the S&P500 had scraped back into the positive and the Dow was only down -130.

Only three S&P500 sectors closed in the green, being communications services, consumer discretionary and technology, which between them are basically “tech” and full of interest rate sensitive growth stocks.

The biggest losses were, of course, reserved for energy (-4.0%) and thus utilities (-3.4%).


Spot Metals,Minerals & Energy Futures
Gold (oz) 1765.50 – 42.00 – 2.32%
Silver (oz) 19.21 – 0.76 – 3.81%
Copper (lb) 3.47 – 0.13 – 3.69%
Aluminium (lb) 1.17 – 0.04 – 3.06%
Lead (lb) 0.87 – 0.00 – 0.45%
Nickel (lb) 9.99 – 0.19 – 1.85%
Zinc (lb) 1.38 – 0.06 – 4.37%
West Texas Crude 99.50 – 11.16 – 10.08%
Brent Crude 102.99 – 10.51 – 9.26%
Iron Ore (t) 113.42 + 3.48 3.17%

The reality of tight global supply last night gave way to demand destruction fears in oil markets. The fact that Russia is happily selling to new Asian customers and thus not being impacted by sanctions is also a factor.

Metal prices need China to get back to full production and stimulus, but for all commodities, the US dollar surge is an increasing headwind.

No more so than gold last night.

The Aussie is down -1.0% at US$0.6802.


The SPI Overnight closed down -64 points or -1.0%.

The US will report June private sector jobs tonight.

GrainCorp ((GNC)) goes ex today.

The Australian share market over the past thirty days…

ASB Austal Upgrade to Outperform from Neutral Macquarie
NCM Newcrest Mining Downgrade to Hold from Buy Ord Minnett
PTM Platinum Asset Management Upgrade to Neutral from Underperform Credit Suisse
SGR Star Entertainment Downgrade to Hold from Add Morgans

For more detail go to FNArena’s Australian Broker Call Report, which is updated each morning, Mon-Fri.

All overnight and intraday prices, average prices, currency conversions and charts for stock indices, currencies, commodities, bonds, VIX and more available on the FNArena website.  Click here. (Subscribers can access prices on the website.)

(Readers should note that all commentary, observations, names and calculations are provided for informative and educational purposes only. Investors should always consult with their licensed investment advisor first, before making any decisions. All views expressed are the author’s and not by association FNArena’s – see disclaimer on the website)

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