Commodities Save the Day

Commodity trading

Quarterly earnings season kicks off in the US this week. Wall Street analysts expect S&P 500 earnings to rise 6.5%. They’ll need to do that, plus a bit more, to keep pushing US stocks higher.

In US trade on Friday, the Dow Jones and S&P 500 broke out to fresh highs, rising 0.4% and 0.47% respectively. Only the NASDAQ failed to make a new high. Is that telling you that tech stocks appear to be lagging?

Time will tell. Perhaps investors are taking profits in tech and moving capital into industrial stocks?

I mentioned a few weeks ago that I thought the NASDAQ might be topping out. I said a 10–15% correction should not come as a surprise. Earnings season will test this forecast. The best thing for an expensive market is strong earnings growth.

If the tech heavy NASDAQ index can’t break out to new highs on good earnings news, you know prices are too high and a deeper correction should play out. You’ll know soon enough.

But it’s not only earnings pushing US stocks around. It’s the good old Fed Reserve too. Thanks to weaker than expected economic data out on Friday, the market thinks the Fed may stay ultra-cautious in raising rates this year.


Instead of two more rate rises in the second half of the year, you may only see one, in December.

That’s what pushed the major indices to record highs on Friday. And it was largely thanks to inflation being non-existent. No inflation, no rate rises. In addition, retails sales fell for the second straight month.

There’s an argument that the rapid pace of technological change is behind the low inflation figure. But if that were the case, you’d see higher productivity growth in the US. That just isn’t happening.

In March, Quartz reported that US productivity growth went backwards in 2016.

According to the US Bureau of Labor Statistics, for the first time since the global financial crisis, multifactor productivity growth was negative in 2016. Multifactor productivity is the most basic measure of how well the economy is turning inputs, like wood and steel, into outputs, like tables and cars. After growing each year from 2010 through 2015, the latest data show that, in 2016, productivity declined by 0.2%.

Maybe people have a little too much technology in their lives. I don’t do Facebook, or any social media for that matter. But from what I can see from the outside looking in, people spend a fair bit of time ‘checking in’.

And half the time they check back out with greater levels of anxiety and a ‘grass is greener somewhere else’ syndrome than what they went in with.

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But I digress…

The point is that the rate rise schedule is now up in the air again. And until some strong economic data surfaces, the market will see rates remaining where they are until December.

This is causing some problems for Australia. You see, it’s making our currency stronger when that is exactly what the RBA doesn’t want or need right now.

Check out the chart below. The Aussie dollar just hit its highest level since April 2016.

The Aussie dollar just hit its highest level since April 2016

Source: Optuma
[Click to enlarge]

There are a couple of tailwinds for the dollar right now. Obviously, the weakness of the greenback (thanks to a Fed on hold) is the main one. But the fact that the RBA has basically ruled out further rate cuts is also supporting the dollar.

The other thing to note is that industrial commodities are doing well again, after struggling for much of the past few months. Broader commodity indices look weak thanks to the struggling oil price, but industrial metals like copper and aluminium are doing well. You can see this in the industrial commodities chart below:

 the industrial commodities chart

Source: Optuma
[Click to enlarge]

That tells you economic growth in the rest of the world isn’t doing too badly, even if it’s struggling a little in the US. Specifically, growth in China — the largest user of industrial metals — must be moving along nicely.


China’s plans will underpin demand for commodities

As just one example, China is pushing ahead to buy and build global trade routes which should underpin demand for commodities for years. As the Financial Times reports:

China is ramping up acquisitions of overseas ports as it expands its reach as a maritime power, doubling its investments over the past year to $20bn and pushing ahead with plans to open new shipping routes through the Arctic circle.

The locations of the ports in which China is investing cluster around three “blue economic passages” that Beijing named in June as crucial to the success of “One Belt One Road”, a grand scheme to win diplomatic allies and open markets in around 65 countries between Asia and Europe.

A study by Grisons Peak, a London-based investment bank, found that Chinese companies have announced plans to buy or invest in nine overseas ports in the year to June in projects valued at a total of $20.1bn. In addition, discussions are under way for investments in several other ports, for which no value has been divulged.

This is just a fraction of the activity that is a part of the grand New Silk Road project. That’s good for Australia, but it does pose problems for the RBA in working out what to do with interest rates.

For the time being, the stronger dollar is acting as a form of monetary tightening on the Aussie economy. This means interest rates are on hold here, too. In fact, if the dollar were to keep rising, it wouldn’t surprise me to see the RBA raise the prospect of another rate cut.

That would be a blow to the housing bust enthusiasts. More on that tomorrow…


Greg Canavan,
Editor, Money Morning

Greg Canavan

Greg Canavan

Greg is the Managing Editor for Money Morning. He helps investors preserve their wealth over the long term using a method known as value investing. Lucky for Money Morning readers, he imparts some of this knowledge on them three times a week with editorial spots.

Greg Canavan is a feature Editor at the Money Morning and is the foremost authority for retail investors on value investing in Australia.

He is also the Editor of Crisis & Opportunity. An investment publication designed to help investors profit from companies and stocks that are undervalued on the market. Greg is the former head of Australasian Research for an Australian asset-management group and has appeared on CNBC, Sky Business’s ‘The Perrett Report’ and Lateline Business. He has written articles for The Sydney Morning HeraldThe Australian and Greg’s aim is to help you create a portfolio of stocks based on sound, proven, investing principles. His system for identifying stocks trading beneath their ‘intrinsic’ value combines a big picture understanding of the financial markets with a thorough valuation analysis of individual securities.

Greg’s method of investing is not about taking huge risks and rushing into big positions. He investigates highly profitable companies trading at a reduced premium to their net asset value, or ‘equity’ value as he puts it – and passes that research on to his subscribers to incorporate into their financial plan as they see fit.

With Greg’s help, you can implement a long-term wealth building strategy into your financial planning, be better prepared for the tough financial challenges ahead and stop making the basic, costly mistakes that most private investors make every time they buy a stock.

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