Commodities and commodity exporters
Eoin Treacy's view I
was driving Mrs. Treacy to the airport this morning when I heard a rather interesting
advert on the radio from a pension provider. It went something like "my
hairdresser says I should invest in oil, my taxi driver says I should invest
in soybeans, my financial advisor says contact XXX"
Veteran
subscribers will be familiar with our view that commodities remain in a secular
bull market. However we have often also said that this long-term view will be
punctuated by occasional recessions. It is by no means clear whether the USA
will enter a recession but much of Europe is in recession and much of Asia retains
a tightening bias. The technical deterioration experienced by both the above
commodities over the last month suggests the risk of a further deterioration
has increased and that a more attractive entry point will become available.
The Latin
American US Dollar Index is comprised of the Brazilian Real (33%), Mexican
Peso (33%), Chilean Peso (12%), Argentine Peso (10%), Colombian Peso (7%) and
Peruvian Sol (5%). All of these are major commodity exporters. The Index collapsed
in 2008 as fears of global economic collapse became pervasive but also recovered
strongly as economic growth picked up. It hit a medium-term peak between April
and June, broke the progression of higher reaction lows in August and fell abruptly
in September. It has paused in the region of the 2010 lows but a sustained move
above last week's high of 108.5 would be required to suggest more than temporary
support has been found.
Commodity
related stock markets have suffered from the relative weakness of their respective
currencies versus the US Dollar as well as declining prices for their exports.
Australian
ASX300
Resources Index, ASX
200 Index and the Australian
Dollar,
New Zealand NSZE
50 Fully Gross and the New
Zealand Dollar
Canada TSX
and the Canadian
Dollar,
South Africa JALSE
and the Rand
Russia RTSI
and the Ruble,
Indonesia JCI
and the Rupiah,
Brazil IBOV
and the Real,
Mexico MEXBOL
and the Mexican
Peso,
Argentina MERVAL
and the Argentine
Peso,
Chile IPSA
and the Chilean
Peso,
Colombia IGBC
and the Colombian
Peso,
Peru IGBVL
and the Sol
The commonality of the Dollar's advance against the above currencies as well
as a host of others suggests widespread deleveraging. The Dollar is becoming
increasingly overbought in the short-term but there is still no clear evidence
that its appreciation has ended. A clear downward dynamic held for more than
a day or two would begin to question short-term scope for additional upside.
The rally posted over the last few weeks has broken a relatively consistent
downtrend and significant trend deterioration would be required to question
medium-term scope for additional upside.
A number
of the above stock market indices have also fallen abruptly. They are becoming
increasingly overextended and also require counter trend dynamics to check momentum.
They have all experienced significant trend deterioration and periods of support
building as well as sustained moves back above their respective 200-day MAs
will be required to signal a return to medium-term demand dominance.