This week in finance: Oil on the rise, iron ore tumbles
Name your poison: missile strikes, weak jobs data, the Fed mulling over winding back its support of the economy or a stalling political agenda inn the US — global markets were dealt pretty unappetising fare to close the week.
While investors chewed morosely over the implications, it was clear a raging signal to buy was not one of them.
Perhaps it was surprising the reaction wasn’t more negative, with Wall Street slipping only marginally, while the ASX futures trading took a more optimistic view and looks like starting the week with a bit of bounce.
Markets on Friday’s close:
- ASX SPI 200 futures +0.2pc at 5,866
- AUD: 74.92 US cents, 70.69 euro cents, 60.53 British pence, 83.31 Japanese yen, $NZ1.08
- US: Dow Jones flat at 20,656 S&P500 -0.1pc at 2,356 NASDAQ -0.1pc at 5,418
- Europe: FTSE +0.6pc at 7,349 DAX -0.1pc at 12,225 Eurostoxx50 +0.2pc at 3,496
- Commodities: Brent oil 0.6pc at $US55.24/barrel, Gold +0.2pc at $US1,256/ounce, Iron ore -6.8pc at $US75.45/tonne
Oil and gold were two asset classes that benefited from the US airstrikes in Syria.
Gold provided its usual safe haven retreat, while oil reversed its recent weakness and bubbled up.
The key global benchmark, Brent crude, rose 0.6 per cent of Friday and was up more than 4 per cent for the week.
Earlier in the week, fears of high inventories in the US and ever more shale rigs coming on stream were shrugged off on the belief that demand for oil was picking up.
Then the US Tomahawk missiles rained down on some very strategic real estate of the Syrian regime.
Missile strikes put pressure on OPEC-Russia deal
Syria itself doesn’t pose any issues for oil supply. Its potential 400,000 barrels a day production has been offline for years as the civil war there drags on.
As RBC commodities analyst Helima Croft pointed out in a note over the weekend, if the fighting in Syria was to intensify and spill over the borders into neighbouring producer states, regional supplies would be at risk.
While she said such a scenario was unlikely, the air strikes still posed a couple of tricky questions that ultimately impact global oil.
“First, do new strains emerge between Russia, a principal supporter of [Syrian President] Assad, and the Sunni Gulf states that are the key funders of the rebels?” Ms Croft asked.
By extension, it could derail the cooperation — and possible extension — of the production cut deal brokered between OPEC and Russia.
“Up to this point, Russia has been able to maintain its support for Assad and warm relations with Iran, all while concluding arms deals and energy cooperation agreements with countries like Saudi Arabia,” Ms Croft observed.
“However, it will be important to watch whether Syria does emerge as something of a deal breaker in the wake of the conflict’s altered dynamics.”
Then there is the issue of Iran, which supports Mr Assad in a “my enemy’s enemy” sort of way.
The US intervention has the potential to overturn the conventional wisdom that the more moderate Iranian President Rouhani would be returned to power in May’s election.
“The nuclear deal and the sanctions relief that enabled the return of Iranian oil exports would certainly be imperilled if Rouhani were defeated by a candidate with more hawkish/anti-American credentials,” Ms Croft observed.
All of which means, the oil price is unlikely to crumble while political uncertainty remains the dominant theme.
Iron ore capitulates
Iron ore has looked wobbly for weeks, and Friday it finally rolled over.
Spooked by the record stockpiles of iron ore towering over Chinese ports, traders blinked sending futures crashing.
Dalian iron ore contracts tumbled 7 per cent, coking coal futures dropped 4 per cent and Shanghai rebar steel futures fell 5 per cent, with the sentiment for Chinese steel not helped by some anti-dumping action coming from the European Union.
The futures panic hit the physical market with spot iron ore prices falling almost 7 per cent on Friday, to be down 20 per cent from the giddy heights of February.
Certainly sentiment has changed and Friday sell-off doesn’t bode well for the likes of Rio Tinto, BHP Billiton and Fortescue in the near term at least.
US jobs disappoint
The 98,000 jobs created in the US during March was a considerable miss on the expectations of a number closer to 190,000.
However it wasn’t so bad. Unemployment fell again, wages were revised up, keeping the inflation on its slow march higher.
The Fed is mostly likely to look through the result and keep on its path for two, or more likely three, more hikes this year.
However the winding up of the Fed’s massive bond-buying program seems to be of greater concern for investors.
It probably shouldn’t be. After the badly communicated “Taper Tantrum” of 2013, any move from the Fed will be a well publicised, gradual running off of maturing bonds.
It also signals the US economy is being taken off critical care and returning to some semblance of health.
As for the political agenda, perhaps the one thing the market hadn’t factored in was President Trump picking a fight with Russia over Syria.
From the immediate reaction, the missile strike was just another imponderable to add to the policy quagmire of tax, bank deregulation and healthcare.
A fresh US quarterly reporting season, which starts this week, may give markets something more solid to grasp than the current political uncertainty in the US.
Earnings are expected to be up almost 10 per cent on the March quarter of last year. Returns either side of that benchmark are likely to provide some more meaningful direction for investors.
Jobs to rebound in March
The labour market — or rather the faltering employment picture — is moving up the Reserve Bank’s list of worries, although still a fair way behind hot housing markets in Sydney and Melbourne.
Last month unemployment kicked up to 5.9 per cent after a net loss of jobs.
RBA governor Philip Lowe recently described the labour market as “pretty soft” and said he wanted to “see an improvement before … being confident that growth in the overall economy is strengthening”.
The consensus view is March data, out on Thursday, will be an improvement.
“We expect some statistical payback after the two ticks jump in the unemployment rate last month from 5.7 per cent to 5.9 per cent,” Citi’s Paul Brennan said.
“Our forecast is for a 20,000 rise in employment in March and for the unemployment rate to retrace slightly to 5.8 per cent.”
However Mr Brennan is hardly bullish on jobs overall.
“The March labour market report will likely be another reminder that economic growth is below trend and that the pace of wage rises is unlikely to pick up in the near future,” he said.
RBA to highlight housing worries
Also on Thursday the RBA will release its biannual Financial Stability Review, which will give it the opportunity to again warn borrowers and the banks about growing financial risks posed by the housing market.
“This is likely to present a very different assessment to that presented in October last year which was more sanguine about financial stability risks,” Mr Brennan noted.
Since then China has rebounded strongly and property prices have accelerated, forcing the bank regulator APRA to strongarm the banks and pull a variety of macro-prudential levers to slow things down.
With that in mind, home loan data for February (out Monday) will also make for interesting reading, although they won’t capture all the recent action of banks hiking rates or APRA tightening the regulatory screws.
Measures of business conditions and confidence from the NAB (Tuesday) and consumer confidence (Wednesday) round out the shortened week’s release of data.
|Feb: Keenly watched to see if lending to investors is coming off the boil
|Mar: NAB’s survey of business conditions and confidence
|Apr: Westpac’s survey
RBA financial stability
Mar: 20,000 new jobs and unemployment ticking down to 5.8pc forecast
Biannual publication expected to highlight renewed worries about household debt
|US: Federal Reserve speech
|Chair Janet Yellen speaks at a Q&A session
EU: Industrial production
Mar: Around 2.2pc YoY
Feb: Only sluggish growth
|US: Budget statement
|Mar: Still in a substantial deficit
|Mar: Imports and exports have renewed strength
|Mar: Slowly gaining strength, but may slip this time