Market Matters Morning Report Thursday 28th July 2016

Morning Report 28/07/2016

Market Matters Morning Report Thursday 28th July 2016

The $US is playing the tune for some commodities

When attempting to forecast the future for the price of resources, we must look very closely at both the commodity itself and the $US, which is the currency they are priced in e.g. gold this morning is trading at $US1339/oz.

In simple terms, the price of commodities has an inverse relationship to the $US, when the $US rises the price of commodities falls or at least influenced negatively.

The strong 25% appreciation in the $US from mid-2014 to early 2015, coincided with weakness in Iron Ore, Gold and especially crude oil. Obviously, a commodity also has significant price influences from basic supply and demand, creating a multi-dimensional price matrix e.g. a commodity can still rise when the $US rallies if demand is significantly outstripping supply.

Very noticeably, the explosive rally we have experienced from resources in 2016, coincides perfectly with the $US falling ~8.5% from its recent high, just over the 100 area. The market is continuing to second guess the Fed on interest rate rises for the US, with mixed consistency on a month to month basis. Our view is that the $US will make a fresh high over 100, before a more significant decline. If we are correct, commodities are likely to continue with the choppy price action of late, before another major rally.

Due to many subscriber requests today, we are going to update our views on iron ore, crude oil, and gold - plus of course some stocks in their sectors.

The $US Monthly Index Chart

Crude Oil

Crude oil endured a much-discussed plunge of over 70% from mid-2014 to late 2015, as oil producers flooded the market with oil in an attempt to smash the shale gas industry. Oil has been in recovery mode since February, and our view remains that we will see over $US60/barrel in 2016. The current pullback from oil is very much in step with the recent appreciation of the $US, for us to be correct oil needs to "break free" of the $US correlation for a while.

Technically and psychologically, oil is approaching support in the $US40/barrel region from where we anticipate renewed strength.

Crude Oil Monthly Chart

We are long Origin Energy (ORG) from the $5.50 area and are still bullish, targeting over $6.20. Currently, the ORG share price is largely ignoring the recent decline in crude oil.

Origin Energy (ORG) Monthly Chart

Iron Ore

After reaching our US$70/t target, iron ore has been very resilient, and an "ABC" style rally towards the US$85/t area would not surprise.

While China remains quiet, iron ore remains firm. The stocks in the iron ore sector are leading the rally.

Iron Ore Monthly Chart

Fortescue Metals (FMG) is our preferred stock in the space and now looks heading towards $6, with stops under $3.50.

Fortescue Metals (FMG) Monthly Chart

Gold

Gold is one of the few sectors that we are bullish for the medium term and the way the precious metal has shrugged off recent strength in the $US, is impressive. We are 50-50 short term, but remain buyers of weakness.

With the Chinese continuing to accumulate both gold and potential longer-term inflation fears, as central banks continue to pour $$$ in the system, the future is very supportive.

Gold Monthly Chart

We are looking for buying opportunities in the sector, ideally Regis Resources (RRL) under $3.40 and Newcrest (NCM) under $22.

Regis Resources (RRL) Weekly Chart

Summary

We remain bullish crude oil, gold and now iron ore for 2016 and want again larger exposure to resources after taking profits too early in some positions.

Watch for alerts over the days / weeks ahead.

Overnight Market Matters Wrap

A flat close in US markets last night saw the Dow finish down 2 points to 18,472 after trading in a range of just 112 points. The broader S&P500 closed down just 3 points to 2,167.
As expected the FOMC keep interest rates on hold, with some analysts suggesting there will not be a rate rise until December 2017.
Oil slipped to a three-month low after a week of build-up in supplies of oil and gasoline. It was reported that there was a 1.7m barrel build up in storage, whereas analysts were expecting a drawdown of 2.3m barrels. Oil finished down US$1.00 (-2.3%) to US$41.91/bbl.
Gold was firmer on the news that FOMC left interest rates on hold. Gold finished up US$5.90 (+0.4%) to US$1,339.90/oz.
The ASX 200 is expected to test the 5,570 level this morning, up over 25 points as indicated by the September SPI Futures this morning.

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 28/07/2016. 9:00AM.

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