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Oil, Iron Ore And Where Stocks Go

FYI | Apr 12 2017

By Peter Switzer, Switzer Super Report

We know our banks are under challenge because of the housing hysteria that grabbed headlines last week. However it’s not all local stuff because US banks have been selling off lately as well. The reasoning is simple — they have been on a huge price surge since Donald Trump’s election. Trump’s health bill failure, along with the latest news that tax reform could take some time, raises questions over his plans for banking deregulation.

There’s also been a bit of a slowdown in economic growth and last week’s job numbers in the US weren’t great for optimism. I don’t trust one month’s numbers but 98,000 showing up when 180,000 was the tip has to make you think: “Is the US economy losing steam?”

Here’s my answer: the ADP private sector jobs survey reported 263,000 against a forecast of 170,000 and that followed 245,000 jobs in February. I’m not worried about the US economy, yet.

But there are a couple of issues I’m watching carefully.

Iron ore is down 20.5% since February 21. That’s why one newspaper called it a bear market over the weekend. Since early last year, however, it has had a huge price rise.

I think this chart puts the “bear market” into context. I think it’s significant that BHP’s and Rio’s share prices have not been devastated recently.

The tip has been out there for some time that iron ore prices had to come down and it makes sense, given that the price averaged $US79 a tonne in the March quarter, up 23% from the December quarter and 75% year-on-year.

Also hurting iron ore prices was an EU anti-dumping decision against Chinese steel products and it comes as supply of iron ore has surged. Brazil recently revealed a 27% rise in supply to China and this coincides with local suppliers — BHP, Rio and Fortescue — all pumping out huge amounts of ore. And then there is Gina Rinehart’s Roy Hill project, which is another supply surge contributor!

However, this comes as the Department of Industry, Innovation and Science speculated that the world trade in iron ore is forecast to grow by 4.2% and 2.6% in 2017 and 2018, respectively, before moderating to grow at an average annual rate of 0.7%, to reach 1.61 billion tonnes in 2022.

Last year, China, the largest consumer of iron ore globally, broke its importing record. That’s why prices went ballistic. Business Insider says this “equated to a mind-boggling average of 32.4 tonnes of iron ore that was imported every second during the year.”

Not only did China cutback on dirty steel production at home, it pumped up stimulus for construction, so we better hope the positive economic growth forecasts for China are sustained this year.

“We think prices will come down but settle around the $US50 a tonne range, which still means good money can be made by the larger producers, such as BHP, Rio, and Fortescue,” Department of Industry, Innovation and Science chief economist Mark Cully said. (Fairfax)

On oil, the Syrian incident has spiked the price to the best level in a month. Word has it that OPEC members next month on extending their quota cuts beyond the initial six-month period.

But it’s not just Syria and OPEC helping the case for oil.

RBC Capital Markets Head of Commodity Strategy, Helima Croft, told CNBC that prices will climb to the low $60s within months, which would be close to a 20% jump.

“We see it grinding higher over the back half of the year,” he predicted. “We’re coming out of refinery maintenance season. So, we’re going to start to see draws of the U.S. inventory. Those high U.S. inventory numbers have really been depressing prices.”

Morgan’s Michael Knox always tells me the driving season for Europeans and Yanks is also good for oil demand, so maybe that’s one concern we can put lower on the worry list. Remember, lower oil prices a few years back were terrible for stock prices, so stability on a rising trend is a plus for stock market bulls.

Generally I remain bullish on energy-related stocks with even the Federal Government putting pressure on gas suppliers with predictions of electricity shortages in coming years.

So how do we play stocks in coming months?

I think a market surge would be a surprise and a sell off (given the “sell in May” inclination) is more likely. And given there are a few scare factors around right now just when valuations are on the high side, I think a market drop is highly possible.

But whatever happens short term, my ‘buy the dip’ investing strategy still makes sense.

Stephen Parker, head of thematic solutions at J.P. Morgan Private Bank in the US, agrees with me.

“What we’re telling clients is, ‘be patient right now,'” he told CNBC. “We may see some volatility, but if you do see a pullback in markets, that’s more an opportunity to buy than a reason to think that this rally is over.”

As I have been arguing, Trump is a turbo-charger but the underlying economic and market fundamentals are all good for investing.

Parker admits pro-business policies out of Washington could drive stocks higher, but “the bull case ultimately hinges on what he sees as improving global growth, and the potential for stronger earnings for the rest of the year,” CNBC pointed out.

Personally, I’m not adding to my portfolio right now. If there is a dip, however, I will be buying.


Peter Switzer is the founder and publisher of the Switzer Super Report, a newsletter and website that offers advice, information and education to help you grow your DIY super.

Content included in this article is not by association the view of FNArena (see our disclaimer).

Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.

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