Did the IMF Ignite the Resources Sector?
The ASX200 again rallied strongly yesterday, gaining 50-points / 0.87% as the major resource stocks powered towards their fresh 2017 highs, something we’ve been targeting since we started aggressively accumulating weakness in the sector 3-4 months ago. MM is currently holding its largest exposure to the resources sector since our inception via AWC, BHP, OZL and RIO, not including our small exposure to the gold sector via NCM. Today we are going to clarify our thoughts on the sector, following its recent strength, plus comments by the IMF (International Monetary Fund) around global growth earlier in the week.
Our current view around the overall index has not changed, but obviously it now looks likely that this July will now be the tightest range since mid-2014!
1. The ASX200 remains range bound between 5629-5655 support and 5836-5810 resistance.
2. Our preference is still for a further correction back towards 5500 in August / September and the more begrudging the pullback the keener MM will become to buy the retracement.
This morning, resources look set for a rest with BHP gaining only 10c even following strong gains in oil and copper.
ASX200 Daily Chart
US Stocks
Last night, US equities were a touch stronger as reporting season continues to unfold with a clear positive bias. The NASDAQ may now fall marginally short of our 6000-targetarea and it’s important to remember we are targeting a 6-7% correction from this hot sector in coming months.
However, importantly for local investors, when the NASDAQ corrected sharply over 5% in June / July the ASX200 basically ignored the move. The broad S&P500 will need to correct before we are likely to take notice and we are looking for a smaller 4-5% correction here.
US NASDAQ Weekly Chart
European Stocks
No change, Europe has recently been tricky with the German DAX now approaching strong support in the 12,000-area, following a 6.2% correction, while the UK FTSE looks vulnerable to further declines, especially as investors understandably get increasing concerned around BREXIT.
German DAX Weekly Chart
Earlier in the week, the IMF lowered growth forecasts for the UK and warned it sees the US fading as the global growth engine, however it sees growth picking up in China, Japan, Canada and the euro zone. Overall, they are looking for the world economy to expand by 3.5% this year, up from 3.2% last year and by a healthy 3.6% next year. The markets seem to be agreeing with the IMF as the $US fell to its lowest level for the year and this morning we see the $A back over 80c - its highest level since mid-2015. Their projected 6.7% growth for China definitely looks positive for commodities for now.
Moving on to MM’s 4 positions in the general resources sector and our importantly plans moving forward:
1 Alumina (AWC) $1.93
AWC is our only resources position in the MM portfolio which is currently behind following last week’s weakish result from Alcoa in the US. We are comfortable to hold for now with a potential ~3c fully franked dividend looming in August. Our ideal target remains close to $2.20 in the first instance and potentially $2.50.
Alumina (AWC) Monthly Chart
2 BHP Billiton (BHP) $25.37
BHP has finally regained its mojo with the likes of iron ore, oil and copper all rallying nicely. Our target remains over $28,plus there is a nice ~50c fully franked dividend looming in early September.
BHP Billiton (BHP) Weekly Chart
3 OZ Minerals (OZL) $8.16
OZL has taken us on a rocky road with both our investment and trading position in and out of profit, but finally the market listened to our view yesterday sending OZL up almost 11% into our initial target area.
Our investment position is now showing a +13% profit and trading position +3.3%, not spectacular but considering the stock was a $1.85 / 22% lower in May a very refreshing result to-date. Also copper which OZL follows closely finally hit our target area yesterday as it surged to new levels not seen since mid-2015 – very similar to the $A. We think it’s time to take the $$ and pare back our resources exposure by selling OZL into the current strength.
OZ Minerals (OZL) Daily Chart
Copper Monthly Chart
4 RIO Tinto (RIO) $64.65
We remain bullish RIO targeting an eventual break of $70 in 2017 plus RIO is forecasted to pay a healthy fully franked dividend early next month.
RIO Tinto (RIO) Weekly Chart
Conclusion (s)
We remain bullish resources moving into the second half of 2017, but we have regularly discussed the stock / sector rotation that the ASX200 is currently experiencing as the major bull market matures. Hence, we are looking to take profit on OZL this morning, looking to slightly pare back our resources exposure into the current strength *Watch for alerts*.
Overnight Market Matters Wrap
The US equity markets finished their session on record highs overnight, following the US Federal Reserve leaving its key interest rate unchanged.
Iron Ore continues its strength, rallying 1.37% overnight with BHP expected to outperform after ending its US session up an equivalent of 0.4% from Australia’s previous close.
The ASX 200 is expected to open with little change this morning at 5775 as indicated by the September SPI Futures.
Disclosure
Market Matters may hold stocks mentioned in this report. Subscribers can view a full list of holdings on the website by clicking here. Positions are updated each Friday.
Disclaimer
All figures contained from sources believed to be accurate. Market Matters does not make any representation of warranty as to the accuracy of the figures and disclaims any liability resulting from any inaccuracy. Prices as at 27/07/2017. 8.00AM.
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