Tag: Iron Ore

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Australia: Hard times

You don’t have to be an Einstein to figure out that 2023 is going to be a tough year. Australian consumers have already worked this out, with sentiment plunging to record lows.

Australia: Consumer Sentiment

The bellwether of the Australian economy is housing. Prices are tumbling, with annual growth now close to zero.

Australia: Housing

Iron ore, another strong indicator, rallied on news that China is easing COVID restrictions but prices are still trending lower.

Iron Ore

The Chinese economy faces a host of problems. A crumbling real estate sector, over-burdened with debt. Threat of a widespread pandemic as COVID restrictions are eased. Private sector growth collapsing as the hardline government reverts to a centrally planned economy. And a major trading partner, the US, intent on restricting China’s access to critical technology.

China

Rate hikes and inflation

The RBA hiked interest rates by another 25 basis points this week, lifting the cash rate to 3.1%. But the central bank is way behind the curve, with the real cash rate still deeply negative.

Australia: RBA Cash Rate

Monthly CPI eased to an annual rate of 6.9% in October, down from 7.3% in September, reflecting an easing of goods inflation.

Australia: CPI

But a rising Wages Index reflects underlying inflationary pressures that may force the RBA to contain with further rate hikes.

Australia: Wages Index

The lag from previous rate hikes is also likely to slow consumer spending. Borrowers on fixed rate mortgages face a steep rise in repayments when their existing fixed rate term expires and they are forced to rollover at far higher fixed or variable rates. A jump of at least 2.50% p.a. means a hike of more than A$1,000 per month in interest payments on a $500K mortgage.

Australia: Housing Interest Rates

GDP Growth

The largest contributor to GDP growth, consumption, is expected to contract.

Australia: GDP Contribution

Real GDP growth is already slowing, with growth falling to 0.6% in the third quarter — a 2.4% annualized rate. Contraction of consumption is likely to take real GDP growth negative.

Australia: GDP Contribution

Plunging business investment also warns of low real growth in the years ahead.

Australia: Business Investment

Record low unemployment seems to be the only positive.

Australia: Business Investment

But that is likely to drive wage rates and inflation higher, forcing the RBA into further rate hikes.

Conclusion

We may hope for a resurgence of the Chinese economy to boost exports and head off an Australian recession. But hope is not a strategy and China is unlikely to do us any favors.

We expect rising interest rates to cause a sharp contraction in the housing market, tipping Australia’s economy into a recession in 2023.

Acknowledgements

Charts were sourced from the RBA and ABS.
Ross Gittins: Hard times are coming for the Australian economy

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Global recession warning

Copper broke primary support at $9,000 per metric ton, signaling a bear market. Known as “Dr Copper” because of its prescient ability to predict the direction of the global economy, copper’s sharp fall warns of a global recession dead ahead.

Copper (S1)

The Dow Jones Industrial Metals Index broke support at 175, confirming the above bear signal. A Trend Index peak at zero warns of strong selling pressure across base metals.

DJ Industrial Metals Index (BIM)

Iron ore retreated below $125 per metric ton, warning of another test of $90. Further sign of a slowing global economy.

Iron Ore (TR)

The Australian Dollar is another strong indicator of the commodity cycle. After breaking primary support at 70 US cents, follow-through below support at 68.5 confirms a bear market. A Trend Index peak at zero warns of selling pressure.

Australian Dollar (AUDUSD)

Brent crude remains high, however, propped up by shortages due to sanctions on Russian oil. Penetration of the secondary trendline (lime green) is likely, as signs of a slowing economy accumulate. Breach of support at $100 per barrel is less likely, but would confirm a global recession.

Brent Crude (CB)

Long-term interest rates are falling, with the 10-year Treasury yield reversing below 3.0%, as signs of a US contraction accumulate.

10-Year Treasury Yield

ISM new orders fell to their lowest level since May 2020, in the midst of the pandemic.

ISM New Orders

The Atlanta Fed’s GDPNow forecast for Q2 dropped sharply, to an annualized real GDP growth rate of -2.08%.

Atlanta Fed GDPNow

Conclusion

We would assign probability of a global recession this year as high as 70%.

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ASX confirms a bear market

The ASX 200 broke primary support level at 7000, confirming a bear market.

ASX 200

Long-term interest rates are rising, with bond ETFs falling.

Australia: Bond ETFs

A-REITs respected resistance at the former primary support level of 1500, confirming the primary down-trend. Trend Index peaks below zero warn of strong selling pressure.

ASX 200 REITs

Financials fell dramatically last week, testing primary support at 6000, as the prospect of falling residential property prices and rising defaults looms. Higher interest rates and wider net interest margins should offset this to some extent. Expect retracement to test resistance at 6000. Follow-through below this level would confirm a primary down-trend and strengthen the overall bear market (Financials have been one of the stronger sectors).

ASX 200 Financials

Consumer Discretionary respected resistance at 3000, signaling another decline with a target of 2600 [3000-400]. Trend Index peaks below zero warn of strong selling pressure.

ASX 200 Consumer Discretionary

Consumer Staples broke support at 13K, with respect of the new resistance level warning of another test of 12K.

ASX 200 Consumer Staples

 

Utilities continue their primary up-trend, rising Trend Index troughs indicating strong buying pressure.

ASX 200 Utilities

Industrials are headed for another test of support at 6350. Breach would warn of another test of primary support at 6000.

ASX 200 Industrials

Telecommunications broke support at 1400, signaling a primary down-trend. Trend Index peaks below zero warn of strong selling pressure. Breach of support offers a target of 1200 [1400-200].

ASX 200 Telecommunications

Health Care is consolidating below 42.5K. Reversal below 40K would warn of another test of primary support at 37.5K. A Trend Index peak close to zero would warn of fading buyer interest.

ASX 200 Health Care

Information Technology continues in a primary down-trend, with Trend Index peaks below zero warning of selling pressure. Follow-through below 1400 would offer a target of 1100 [1500-400].

ASX 200 IT

The Energy sector is advancing strongly, while Trend Index troughs above zero signal buying pressure. The prospect of Chinese lockdowns easing is likely to boost demand for oil and gas, sending prices soaring.

ASX 200 Energy

Metals & Mining respected resistance at 6250, warning of another test of 5500. Declining Trend Index peaks suggest buyer interest is fading. Respect of support at 5500 would signal that the up-trend is intact but breach seems more likely and would offer a target of the November ’21 low at 4750.

ASX 300 Metals & Mining

The broad DJ Industrial Metals Index respected resistance at 200, while Trend Index peaks below zero warn of strong selling pressure. Easing of lockdowns in China may increase demand but a bear market remains likely.

DJ Industrial Metals Index

Iron ore is also undergoing a correction. Breach of support at 125 would warn of another test of primary support at 90.

Iron Ore

The All Ordinaries Gold Index is again testing support at 6000, while Trend Index below zero warns of selling pressure.

All Ordinaries Gold Index

The price of Gold in Australian Dollars, however, is trending upwards, with rising Trend Index troughs indicating increased interest from buyers. Expect a test of A$2800 per ounce. Breakout would offer a target of A$3400 [2800 + 600].

Gold in Australian Dollars

Conclusion

ASX 200 broke support at 7200, confirming a bear market. Rising long-term interest rates and a poor global economic outlook are expected to weaken most sectors, while easing of China’s lockdown restrictions should provide some relief to energy and metals.

Our weighting for ASX sectors is:

  • A-REITs: heavily underweight
  • Financials: neutral
  • Staples: neutral
  • Discretionary: heavily underweight
  • Utilities: overweight
  • Industrials: neutral
  • Telecommunications: underweight
  • Health Care: neutral
  • Information Technology: heavily underweight
  • Energy: heavily overweight
  • Iron ore & Base Metals: underweight
  • Critical Materials (e.g. Lithium and Rare Earth Elements): heavily overweight
  • Gold: overweight
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ASX: Financials suffer, A-REITs advance on lower rates

The ASX 200 advance is tentative, with a short doji candle signaling hesitancy, and we expect retracement to test support at 7000.  The Trend Index trough above zero indicates longer-term buying pressure. Respect of support is likely and would signal a fresh advance.

ASX 200

Financial Markets

Bond ETFs broke through resistance, signaling falling long-term interest rates.

Australian Bond ETFs

A-REITs advanced on the prospect of lower long-term interest rates.

ASX 200 Property

Bank net interest margins, however, are squeezed when interest rates fall.

Bank Net Interest Margins

ASX 200 Financials retreated to test support at 6500. The trend is unaffected and Trend Index troughs above zero indicate long-term buying pressure.

ASX 200 Financials

Mining

Mining continues to benefit from the infrastructure boom, with iron ore respecting support at $200/ton1. Troughs above zero, flag buying pressure, and respect of support both signal another advance.

Iron Ore

The ASX 300 Metals & Mining index is again testing resistance at 6000. Breakout would signal another advance, with a target of 65002.

ASX 300 Metals & Mining

Health Care & Technology

Health Care respected its new support level and is advancing strongly. Expect resistance between 45000 and 46000.

ASX 200 Health Care

Information Technology recovered above former resistance at 2000, warning of a bear trap. Expect resistance at 2250; breakout would signal a new advance.

ASX 200 Information Technology
Gold

The All Ordinaries Gold Index (XGD) is testing resistance at 7500. Breakout would signal a fresh advance, with a target of 9000.

All Ordinaries Gold Index

The Gold price is retracing to test the new support level at A$2400 per ounce. Respect of support is likely and breakout above A$2500 would be a strong bull signal for Aussie gold miners.

Gold in AUD

Conclusion

We expect A-REITs and Bond ETFs to advance on the back of lower long-term interest rates.

Financials are expected to undergo a correction as interest margins are squeezed.

Metals & Mining are in a strong up-trend because of record iron ore prices.

Health Care is recovering well and expected to test resistance.

Technology had a strong week but the outlook is still uncertain.

We expect the ASX 200 to retrace to test support at 7000 as its largest sector (Financials) undergoes a correction.

Notes

  1. Tons are metric tons unless otherwise stated.
  2. Target for Metals & Mining is calculated as support at 5000 extended above resistance at 5750.
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ASX 200 lifted by resources

The ASX 200 is advancing towards its medium-term target of 7200 after breaking resistance at 6800. A high trend index trough signals buying pressure.

ASX 200

Primary driver of the advance is Resources. Signing of phase one of the US-China trade deal lifted iron ore, which is  testing resistance at 95. Consolidation at/below 95 is likely, however, given that the mid-2019 peak was caused by supply disruption in Brazil.

Iron Ore

The ASX 300 Metals & Mining index is headed for a test of resistance at 4800.

ASX 300 Metals & Mining

Financials are weak, but the ASX 300 Banks index found support at 7250. Respect of the descending trendline would warn of another decline, with a short-term target of 7000. Penetration of the trendline is less likely but would warn that a bottom is forming.

ASX 300 Banks

The ASX 200 REITs index is testing resistance at 1680, reflecting the investor demand for yield.

ASX 200 REITs

A weakening Australian Dollar may lift exports slightly but reflects concerns over the phase one US-China trade deal and the impact substantive purchase commitments made by China will have on other energy and commodity suppliers. Breach of 68.50 would offer a short-term target of 67 US cents.

AUDUSD

We continue to hold a bearish view on the domestic economy but recognize that the tailwind from resources may partly alleviate this. IT and Healthcare sectors are, in our view, over-priced and we maintain our focus on defensive and contra-cyclical (gold) stocks.

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ASX 200 breakout

The ASX 200 broke resistance at 6800, signaling a fresh advance. Expect retracement to test the new support level; respect would strengthen the bull signal.

ASX 200

Primary driver of the advance is resources. Talk of an imminent phase 1 US-China trade deal lifted iron ore, which is now testing resistance at 95. Expect retracement to test primary support at 80 but respect would confirm that a base has formed.

Iron Ore

The ASX 300 Metals & Mining index is advancing in step with iron ore prices, with a short-term target of 4800.

ASX 300 Metals & Mining

Financials remain weak, with the ASX 300 Banks index ranging in a bearish narrow band between 7200 and 7500. Respect of the descending trendline would warn of another decline, with a short-term target of 7000.

ASX 300 Banks

The ASX 200 REITs index recovered after a false break below 1580, with a short-term target of 1680.

ASX 200 REITs

We maintain a focus on defensive and contra-cyclical (gold) sectors because of our bearish outlook for the Australian and global economy.

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ASX 200 hesitant because of banks

Financials are still weak. The ASX 300 Banks rally appears short-lived, posting a red candle for the week. Expect another test of support at 7200; breach would test primary support at 6750.

ASX 300 Banks

The ASX 200 REITs index recovered above support at 1600. False breaks on both the bull and bear side indicate hesitancy but declining peaks on the Trend Index warn of long-term selling pressure.

ASX 200 REITs

The ASX 300 Metals & Mining index is more bullish, having broken resistance at 4450. Expect retracement to test the new support level; respect would confirm the target of 4800.

ASX 300 Metals & Mining

Talk of an imminent trade deal lifted iron ore above previous support at 90. Expect another test of primary support at 80, but respect would confirm that a base is forming above 80.

Iron Ore

A bearish financial sector is holding the ASX 200 back. Follow-through above recent weekly highs would signal another advance, while reversal below 6600 would test primary support at 6400. Further consolidation between 6400 and 6800 is just as likely given the gradual decline on the Trend Index.

ASX 200

We are avoiding highly-priced growth stocks and focusing on defensive and contra-cyclical sectors because of our bearish outlook for the Australian and global economies.

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ASX 200 hesitant

The resources sector is strengthening.

The ASX 300 Metals & Mining index broke resistance at 4450, suggesting another advance. Buoyed by rising iron ore prices, the breakout offers a target of 4800.

ASX 300 Metals & Mining

Talk of an imminent trade deal lifted iron ore above previous support at 90. Expect another test of primary support at 80, but respect would confirm that a base has formed above 80.

Iron Ore

Financials, on the other hand, are still weak.

The ASX 300 Banks index continues in a down-trend. Expect retracement to test resistance at 7600 but reversal seems unlikely at this stage. Respect of resistance would confirm a target of 6800.

ASX 300 Banks

The ASX 200 REITs index broke support at 1600 after a false break through 1650. Typical of a bull trap, expect a decline to test support at 1500.

ASX 200 REITs

A bearish outlook for banks is keeping the ASX 200 hesitant. The daily chart shows narrow consolidation below resistance at 6750; a bullish sign. Breakout is likely but the Trend Index below zero warns that buyers are cautious.

ASX 200

We maintain low exposure to Australian equities, with a focus on defensive and contra-cyclical stocks, because of our bearish outlook.

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Banks drag on ASX 200

Banks are plagued by fears of large AUSTRAC penalties for breaches of anti money-laundering and counter-terrorism regulations. Commonwealth have paid a $700 million fine, Westpac have already been charged, NAB alerted investors of potential liabilities in their annual report, while ANZ says there are no signs of transgressions.

In other problem areas, mortgage stress continues to rise, with Martin North (Digital Finance Analytics) estimating that 32.5% of households are now in mortgage stress “based on an assessment of their cash flow.” Worst hit are fringe suburbs, where the rate is as high as 60%.

Elsewhere, RBNZ eased their calls for major banks to increase Common Equity Tier 1 Capital (CET1) to 13.5%, with a further 2.5% comprising other forms of capital such as hybrids and convertible preference shares, and relaxed the phase-in from 5 to 7 years. But the changes will still $13.8 billion in additional capital, according to the big four banks. APRA, by comparison, requires a CET1 ratio of 10.5%.

The ASX 300 Banks index continues to trend lower, with declining peaks on the Trend Index warning of selling pressure. Expect retracement to test resistance at 7600; respect would confirm the  target of 6800.

ASX 300 Banks

The ASX 200 REITs index is again testing support at 1600 after a false break above 1650. Breach of support remains unlikely, with financial markets searching for yield, but would offer a target of 1500.

ASX 200 REITs

Iron ore has made a bear market rally to test resistance at 90. Respect of resistance is likely and would warn of another decline.

Iron Ore

A Trend Index peak near zero on the ASX 300 Metals & Mining index warns of another test of support at 4100 (neckline of a large head-and-shoulders reversal pattern). Breach would offer a target of 3400, while respect of support would indicate that a base is forming.

ASX 300 Metals & Mining

Declining banks are dragging the ASX 200 lower and another test of support at 6400 is likely. A resources sector reversal would increase the chance of top forming on the broad index

ASX 200

We maintain low exposure to Australian equities, with a focus on defensive and contra-cyclical stocks, because of our bearish outlook.

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ASX 200: Banks break support

ASX 300 Banks index broke support at 7600, signaling a correction to test primary support at 6750. Declining peaks on the Trend Index confirm selling pressure.

ASX 300 Banks

The ASX 200 REITs index has formed a bearish descending triangle. Breach of support at 1600 would warn of a correction. It seems unlikely that would reach primary support at 1350 because financial markets are searching for yield.

ASX 200 REITs

The ASX 300 Metals & Mining index is also faltering. Expect another test of support at 4100 (neckline of a large head-and-shoulders reversal pattern). Breach would offer a target of 3400. The Trend Index penetrated its descending trendline but a peak near zero would warn of continued selling pressure.

ASX 300 Metals & Mining

Iron ore found short-term support at 80 but continues its primary down-trend. Our long-term target is 65.

Iron Ore

The ASX 200 retreated from resistance at 6800. Declining Trend Index peaks only indicate secondary selling pressure at present. Expect another test of support at 6400. Breach is still unlikely but would offer a target of 5400.

ASX 200

We maintain low exposure to Australian equities, with a focus on defensive and contra-cyclical stocks, because of our bearish outlook.

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