Global markets were mainly closed overnight due to a Bank holiday in Britain and the US and with a two-day holiday in China. Closer to home, local markets were quiet, with both the ASX & NZX selling off yesterday.
The price of iron ore has fallen sharply in recent times, and there has been no relief as Australia’s largest export continues its wild ride. Investor sentiment on iron ore has turned decidedly negative after what had been a stellar run since mid-2016. Weakness in the price of iron ore has been one factor contributing to the fall in the Aussie dollar in recent months.
We had warned that moves in the iron ore sector had come too far, too fast, and prices appeared stretched to us in November 2016. While we are not surprised by a retracement, we did not expect the speed and dramatic fashion in which it has reversed course.
Iron Ore Price
The fall has been driven by the resurfacing of concerns that demand will slow, particularly if China tightens its monetary policy further. However, the supply side is dominating headlines, as iron ore stockpiles at Chinese ports remain near record highs. There continues to be debate on how best to interpret the current state of steel and iron ore inventories in China. However, given the speculative nature of China’s futures markets, volatility is likely to persist either way, in our view.
Stock in Focus: BHP Billiton (BHP.AX)
We have been supporters of BHP since late 2015, as our preferred mining sector pick given its large scale and diversified mining businesses. As BHP has a diverse commodity production portfolio, it is not as heavily reliant on the iron ore price as many other Australian listed mining companies.
In terms of recent news flow, BHP has recently announced it will sell some of its US Shale Gas division, and there continue to be headlines around whether BHP should split its petroleum arm from the rest of the business (activist US hedge fund, Elliot Associates, is publicly urging BHP to demerge its petroleum arm). BHP believe that the costs of the proposal would significantly outweigh any potential benefits.
We are currenlty BUY rated BHP as our only mining portfolio holding.
Members should look out for a full update on BHP to be released in our weekly report.
Australia & New Zealand Market Movers
The Australian share market moved lower yesterday (ASX 200 index -0.78%) as selling across the Banks continued and the price of iron ore fell sharply on Friday, weighing on the miners. In other news, home loan customers have been stung again with another lender hiking deals on interest-only loans. Lender AMP yesterday revealed all new business for owner occupiers signing up to interest-only variable rates would rise by 28 basis points.
The New Zealand market fell on Monday (NZX 50 index -0.39%) in quiet holiday trading as dual-listed banking stocks Australia and New Zealand Banking Group and Westpac Banking Corp weighed on the local market, while Fisher & Paykel Healthcare added to gains. A2 Milk led the market lower as investors continued to take some profits. While the stock has come under some pressure in recent days, it is still up significantly (+61%) in 2017.
3 Things Markets Will be Watching this Week
1. Whether market calm persists and if the US market hits new all-time highs.
2. Important monthly US manufacturing and employment data is released at the end of the week.
3. The Reserve Bank of New Zealand releases its financial stability report on Wednesday.
Have a Great Day,
Team