Global Markets Overview – 3/11/14

Vigilance required on macro events

We are currently inundated with influential macro events: China data; Russian-Ukrainian tensions; sluggish Japanese data; indifferent US data; steel demand in China and the slide into bear markets of industrial commodities.

Right now investment vigilance is required; Chinese data goes through the March rout every year as Chinese Luna New Year distortions filter through. However, I am acutely aware that the 18.1% drop in exports is harder than expected, and not even the Luna New Year can be blamed for a fall of that magnitude. The data coming from China that requires the most attention is the CPI and PPI prints.

Inflation is now 150 basis points from the reiterate targets announced only last week at the National People's Congress. Falling inflation and the twenty-fourth consecutive month in negative territory for PPI illustrate that demand is possibly contracting. Both consumers and industry are slowing the uptake of goods and this is heaping pressure on industrial commodities and Chinese credit.

The pressure demand is having on metals has finally caught up on the steel to iron ore gap; currently Chinese steel mills are making a 28 yuan loss per tonne (-US$4.54); this alone was likely to impact the price of iron ore through either less demand or a demand from lower prices. Now there is macro pressure adding to the impact of this differential as inflation slides.

This has started to flow through to equities already, with BHP, RIO and FMG all taking massive hits yesterday. There is a warning from the trade - the volume in FMG yesterday was 116% above the 30 day average, BHP and RIO saw trade volumes double their 30-day averages and this was despite the fact that three states had public holidays.

Be very aware that buying the dips during this kind of event is a risk; the volumes suggest a contraction is on the cards and that falls will have some way to go before the bears become exhausted. Having seen Chinese credit overnight halving from the month before and well below the estimates, the slowdown is only going to accelerate. Be vigilant with what traders are telling the market, and with volumes this high, this hasn't fully played out yet.

The other interesting development from the moves in iron ore and mining plays is that the AUD now has the lower correlation as a commodities currency in recent memory. Traditionally the AUD has always been seen as a commodities currency, however it remains unmoved by the events of the past week. This shows that the currency is now wed to the domestic environment and the RBA's position on interest rates, coupled with housing and credit demand.

Could this new trend be muddled if iron ore falls to US$90 a tonne? It is estimated that for every $1 drop in iron ore price, BHP sees $120 million of post-tax profits. This will have a severe impact on economic conditions which could pressure the RBA to return to an easing basis to jawbone the AUD.

Ahead of the Australian open

We are currently calling the market up nine points on the 10am bell (AEDT) to 5420, as defensive stocks see brighter times. The banks and yield plays are likely to see support today, while miners are likely to see more pressure with BHP's ADR point lower by 0.6%. Having seen the bulls being exhausted each time the market hit the 5450 level, and now with macro data helping the bears push sectors lower, volatility is likely to be on the march. Vigilance will be key to trade this week.

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