- Disconnect between equity and physical commodity markets
- Some evidence bulk commodity markets are close to cracking
- An assessment of potential Oz economic downside
- MD departure signals issues at Nexus

By Chris Shaw

Recent equity market moves imply both spot commodity prices and future expectations for these prices are sharply overdone, but this view is not shared by Macquarie. The broker continues to believe in at least a partial disconnection between the equity and physical markets, as the range of potential outcomes continues to broaden due to ongoing concerns about the future of European and US economic growth.

The key for Macquarie is how these events impact on Chinese raw material demand, as it is this that ultimately will drive commodity prices. Looking forward, Macquarie expects persistent Chinese inflationary pressures will ease in coming months, something that would allow for a relaxing of domestic credit tightening measures.

To factor this in Macquarie has revised its commodity price expectations, the biggest changes being sizable increases in Australian dollar, gold and silver price expectations. While copper price estimates have been trimmed from previously aggressive levels, Macquarie continues to see upside from current spot prices. The broker's long-run copper price estimate has been lifted.

Thermal coal forecasts have also risen but the increases have not been to levels above current contract levels. Other bulk commodity forecast changes are small, while Macquarie has lifted aluminium price expectations to account for lower US interest rate risk and increased nickel price forecasts from 2014 to account for nickel pig iron cost pressures.

For Macquarie, key exposures include BHP Billiton ((BHP)) and Rio Tinto ((RIO)), as the big diversifieds continue to offer strong long-term fundamental valuation support. This is especially the case given the expectation iron ore prices can be sustained at US$150-$190 per tonne through the next few years.

This positive view on iron ore prices also means Macquarie remains positive on the pure plays of Fortescue ((FMG)) and Atlas Iron ((AGO)). In thermal coal the key pick is Whitehaven Coal ((WHC)), while Macquarie likes Aston Resources ((AZT)) and Gloucester Coal ((GCL)) among the met coal plays.