Commodities Round up: Is this the time to look at the miners again?
This week in the macro markets U.S. CPI stole the show. This week the consumer price index (CPI) print in the U.S. rose at its fastest pace since 2008. This led the world's indices to wobble and the dollar to have a brief comeback.
The analyst consensus for the reading was around 3.6%
(year-on-year) and the actual number smashed this to hit 4.2%. This presents
the Federal Reserve (Fed) with a problem as they have noted they are willing to
handle an overshoot but few expected a rate this high. A central bank would
normally raise rates if inflation looked like it was moving out of control but
the Fed has been adamant they will wait for full employment before raising
rates. This leaves them stuck between a rock and a hard place.
From a commodities perspective, gold took a dive after the
numbers were digested. If there is another safe-haven asset (US yielding) that
is offering a fixed income return that would obviously put pressure on gold.
In an immediate reaction to the news, U.S. Treasury yields
pushed higher as traders and investors started betting that the Fed would have
to act. Gold has been moving higher in recent weeks so this inflation news threw
a spanner in the works. The question is if the data will continue to stall the
Fed. The last non-farm payroll result was enough to keep them at bay for now
but how long will that last.
Looking at the daily gold chart below it's clear to see the
sell-off on the day of the CPI data. On Thursday the price has recovered some
of the move but until the top of the candle (Wednesday's) is taken out there is
a strong argument the price could continue lower.
For now, the chart is still telling us that the waves are
making higher highs and higher lows but there are two key levels ahead of us.
One is the downward sloping black trendline. If this breaks we could be looking
at a longer-term change in trend. The other is the $1875/oz level (marked in
green), if this breaks then the bulls could take a run-up to the next major
resistance closer to the $2000/oz level. Until those two levels are broken it's
hard to be too bullish on the yellow metal in the long-term.
Let's talk about some mining stocks now. Copper is still
near the recent highs, iron ore is still near its recent highs. There could be
no real rational reason for concern that this global pullback will affect
miners long-term. Year to date on the FTSE 100, the miners are still the
best-performing stocks in the index. Evraz (LSE:EVR), Glencore (LSE:GLEN),
Anglo American (LSE:AAL), and Antofagasta (LSE:ANTO) are all still in the top
10 (year to date) and BHP (LSE:BHP) has recently overtaken Unilever to be the
biggest stock in the index (market cap). If we see even a 15% retracement in
the copper price their margins on the commodity would still have increased
heavily. The supply vs demand gap in the base metal still could have a long way
to go, the commitment from the world's governments to hit their environmental
targets seems solid and there is the fiscal stimulus to back this up.
Below is the weekly BHP Group share price chart and as you
can see we are not too far off the all-time high (marked in the orange shaded
area). At the moment the price is experiencing a small pullback and this could
be another opportunity to enter but there are some levels on the downside that
could be important. If the retracement is slightly deeper then the green area
may come into play and it has been used as a wave high resistance in June 2019
and often resistance can become support. Beyond that, the psychological 2K area
could be next up followed by the purple zone just ahead of 1800p. For now, even
though there is a pullback the bulls look firmly in charge as the general trend
is moving higher but another technical resistance to watch could be the upward
slanting trendline, if the current price trajectory remains the same it could
meet the price at around 2600p. For now, this looks like nothing more than a
blip in an otherwise solid trend.
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