What happened to the FMG share price?
Fortescue Metals Group Ltd [ASX:FMG] was one of the most active stocks today. Like the rest of the market, Fortescue shares suffered a moderate fall in price. While the All Ordinaries fell by 1.56%, FMG shares fell by a similar amount. What is causing the fall, and what will happen next?
Why did FMG shares do this?
The direct relationship here is between energy prices, iron ore, and iron ore producers like FMG. When commodity prices fall, mining stocks fall alongside them. This has especially been true in the last few months. Commodity prices have become a dominant factor in determining the movements of the stock markets.
Of course, on the other side of commodity prices is the US dollar. When the Fed is becoming active with data releases and potential rate actions, the market becomes more nervous. The Fed is in a tightening cycle which provides the ground for higher interest rates and a strengthening US dollar.
A stronger dollar means lower commodity prices, due to the fact that commodities are denominated in US dollars. While there is no definitive conclusion on the direction of causality between the US dollar and commodity prices (meaning we don’t know which drives which), we know they move in negative directions.
What now for FMG?
Last week, while FMG saw some very volatile movements, it eventually recovered well. FMG continues to be one of the best performing stocks in the last six months. The interest in having a long position in mining producers such as FMG rests on the belief that commodities have bottomed. But have they?
There is no argument that commodity prices are very low, which means commodity-producer stocks could be very cheap. If this is indeed a bottom, it could justify having a position in stocks such as FMG. However, investors need to remember that fundamentals are not much better. We could be in a slow recovery phase, or we could see more shocks.
One thing is almost guaranteed in the current market: mining producers, the Fed and commodity prices will give us more volatility.
Emerging Market Analyst, New Frontier Investor