On Tuesday the Bank Credit Analyst asked whether a commodity correction was approaching, based not least on its global leading economic indicator (LEI) signaling that some contagion from the US slowdown was spreading beyond the G7 countries, something which could finally trigger a shakeout in commodity prices.
The trading day saw persistent waves of selling both of commodities, and related securities among listed stocks and futures. There was mixed US economic data out on the day, and the trade weighted dollar rose marginally, prompting investors to take profits in many directions, ranging from crude oil and copper to gold, platinum and silver.
Oil was in the headlines again on Tuesday, not least on persistent reports that certain tankers could simply not find buyers at prevailing prices. New York Mercantile Exchange crude oil for July delivery fell nearly $2 a barrel to around $130. Oil futures reached $135.09 on May 22, the highest since trading in the contract started in 1983. These prices have doubled over the past year.
The Bank Credit Analyst warned that since the end of 2006 there has been an unprecedented divergence between the G7 and non-G7 LEI. However, the steady decline of the non-G7 indicator warns that some contagion may soon develop. Though the worst of the US economic slide may be past, a long period of sluggishness seems probable, and there remain downside risks given the ongoing housing slump and relentless rise in energy prices.
For the Bank Credit Analyst, the bottom line for now is that a slowing in non-G7 economic growth at a time when the US is still weak could be the catalyst for the long overdue correction in commodity prices. We would hold back from putting fresh funds to work until overbought conditions and sentiment ease.
Energy, observes the Bank Credit Analyst, is the fourth commodity sector (after base metals, precious metals, and grains) to see a capitulation blowoff. The other sectors have since entered volatile trading ranges above the previous breakout level.
The Bank Credit Analyst recommends that energy should be downgraded to underweight (US gasoline demand destruction could be imminent, based on car-buying patterns); base metals should be upgraded to overweight (an energy correction could stabilize global growth expectations), and that precious metals be downgraded to neutral (too soon to buy gold or its high-beta derivatives, gold shares and silver. Ideally, a washout below $850/ounce would provide a tactical entry point).
Analysis of nearly 700 stocks listed across the resources spectrum indicates that during the past five trading days, investors have taken profits across the board. Heaviest hit have been listed oil stocks, followed by nickel, zinc, oil sands and copper. Over the past trading day, selling has been heaviest in listed oil stocks, followed by nickel, zinc, oil sands and aluminium. Measured over both periods, listed stocks in potash, platinum, tin and coal have been least affected.
GLOBAL LISTED RESOURCES STOCKS
Composite weighted 12-month net price gains/losses
* Investable market capitalisation
** IMC counted in other sub-sectors
Source: Analysis by Barry Sergeant