Financial market research and analysis

Another day, another down side for mining stocks in the FTSE. The UK bourse is off by 0.4% in early trade in tandem with the Dax and the Cac with only the FTSEMIB trading in positive territory by a mere 0.18%.

The prospect of additional declines in the likes of copper and iron ore prices as a result of rapid decline in China’s domestic steel use in conjunction with increasing production from Australia is weighing on the UK mining complex again this morning. Iron ore mining costs are also likely higher than stated by the impacted companies. As a result, we are seeing the likes of Anglo American (-3.2%) and Glencore (-2.76%) taking the bottom rungs on the UK benchmark this morning – something that has become rather habitual of late.

Copper prices are higher for the second day in a row but remain trapped below trend line resistance form the May highs. Unless price action can make a concerted effort to move through $2.44/lb the downtrend and downside will likely persist and this will be at the expense of gains in basic resource stocks.

There is a distinct reluctance on the behalf of investors to get overly involved in the present equity rally. The fact that we have two central bank meetings this week, the FOMC and the BOJ is adding a certain element of prudence despite the fact that few expect a rate hike from the Fed, (market pricing around 35% probability) and also that akin to last year that Japan may well extend its current QE programme in a bid to achieve its inflation target. Add to this, a very dovish statement from the ECB’s Praet this morning, that there would be ‘no taboos’ in regard to any additional loosening and one would expect to see investors throw caution to the wind and get on board the equity gravy train.

In spite of Praet’s remarks, which should be taken as fairly dovish, the euro appears anchored to the $1.1050 level for the time being, trading in a fairly tight range and with the dollar index capped at the 97.20 level for the time being, it would appear that any downside risks to the single currency will lay at the feet of whatever the Federal Reserve has to say for itself later this week.
Much the same can be said for cable which is also locked in a narrow range as we await the release of the UK Q3 GDP release. Expectations are for growth of 0.6% on the quarter which would culminate in a 2.4% gain year on year. Monetary divergence continues to favour the green back over sterling and this is also helping to cap gains in EURUSD.

Equally, the future of near term oil prices will also be Fed dependent. Prices for oil continue to fall for the 3rd consecutive day with the active contract in Brent Crude trading at $47.20/bbl and below the major moving averages.

BP Plc: (+1.76%) Despite the fact that profits fell by a whopping 40% from the same time last year (not surprising given that oil prices are around 50% lower) the earnings still managed to beat what were extremely downbeat expectations. Adjusted profits totalled $1.82bn while the consensus was for $1.26bn. The company plans to reduce capex even further and targeting $6bn in cost cuts over the next 3 years. The upshot from the weak oil price is that refining has benefited and the choppiness witnessed in the oil market over the past year or so has been to the betterment of commodity trading. Overall, however, the idea that oil will be trading at $60/bbl in the near term is possibly a little optimistic given recent price action and dollar strength.