From the Madometer today:
While it’s unlikely that commodity prices will stage a material rebound, there is a good chance that a trough has been found. There are two reasons for this. Firstly, much of the shrinkage that regulators sought in the commodities market appears to have occurred. Secondly, it looks increasingly likely that the US dollar is at a peak.
Now this clearly carries significant ramifications for the Australian market. It’ll remove a key source of angst for investors and it should counter much of the pressure the Reserve Bank of Australia is under to cut rates again. That may sound counterintuitive as far as the US dollar goes, with most economists arguing that any renewed US dollar weakness strengthens the case for the RBA to cut. This isn’t necessarily the case though, as a weaker US dollar is normally associated with higher commodity prices.
That’s a pretty partial take on things. Recall that there are three drivers of the bust – the US dollar bull market, destocking of the great global hoard and the supply imbalance driven by China slowing and supply side over-investment. The first is showing some promise but the US dollar is not about to fall off its perch. Renewed QE from the ECB and BOJ as well as ongoing Chinese easing are next and although the Fed is on hold there is little to suggest QE4 is necessary. The US dollar bull market is intact. There has been good progress on the market destock of commodities but it has further to go with AUM still high and Chinese inventories around such financialised products as copper remain a real concern.
Exactly which commodities the Madometer is signalling are at the bottom is not clear but given his suggestion that it will lift spirits hints at the major ones: coal, oil/LNG and iron ore. Let’s explore the possibilities on these three:
- oil is still in the early phases of its shakeout with a global daily production surplus of roughly two million barrels. There is big pressure building on high cost producers but Iran is looming as a major new contributor to the glut. At best it appears we’ll be going sideways and there is still a very strong chance of lower. Meanwhile, the LNG glut lies almost entirely ahead;
- iron ore is stuffed. No way around that. It’s going to $40 next year and $30 the year after on supply increases and falling Chinese steel output;
- coal is bashed to death by the climate war and falling steel output. It is at least nearing something of a bottom with perhaps 20-30% more downside.
The unerring Madometer is quite the mechanism.
