Why This Metal Could Ride the Iron Ore Rally

On Friday last week, China got the market all worked up after revealing the latest manufacturing data (PMI) — at least mining stocks, anyway.

Take a look at this:

S&P/ASX 300 Metals and Mining Index Five-Day Chart

S&P-ASX 300 Metals and Mining Index

Source: Yahoo Finance

Two days after the Purchasing Managers Index (PMI) data dropped, the S&P/ASX 300 Metals and Mining Index [ASX:XMM] rallied 2.82%, to 3128.20 points. Investors then had a change of mind, and XMM fell back to 3070 by Thursday night.

The Aussie market is developing a habit of overreacting at the moment. First, the Aussie dollar ran away on speculation that the RBA would raise rates to 3.5% over time. And now, a small increase in Chinese data leads punters to think that perhaps the Chinese economy isn’t a complete mess after all.

In any case, the numbers weren’t that impressive. China’s Caixin PMI rose for a second straight month, to 51.1, bringing it to a four-month high. A Reuters poll of analysts had the figure coming in at 50.4. Above 50 signals an expansion in manufacturing activity.

Many investors prefer to use the Caixin PMI as it tracks small- and medium-sized companies in China, rather than massive, state-owned enterprises (SOEs), which the official Chinese PMI focuses on.

The official Chinese PMI rose to 51.4, which was a smidge under the expected result of 51.9.

While not directly related, the PMI data suggests the Chinese economy is still in the ‘expansion’ phase. This put a rocket under the iron ore price — which rose to US$73 per metric tonne a week later.

However, there is a view that, over the next few months, the iron ore price may stay around this level.

Goldman Sachs believes this to be the case. It has forecast the iron ore price to stay either side of US$70 per tonne for the next three months. This should see the red rocks have an average price of US$60 per tonne by the end of 2017.

Yet supporting the iron ore price is the Middle Kingdom’s recent ‘crackdown’ on low-quality steel producers. This week, The Australian Financial Review reported that the government is sending out 18 teams to inspect and close down low-end and highly-polluting steel mills.

Goldman adds that with China closing mills, this will keep the ore price above US$70, as it will restrict supply in the market. In addition, Goldman alludes to a more buoyant property sector in China over the next six months, saying iron ore prices will remain higher as there’s increasing demand for new infrastructure and property in China.

CNBC backs this view, saying an important indicator in confidence — new construction starts measured by floor area — rose 10.5% for the first half of 2017.

As Australia has firmly hitched itself to China’s economic fortunes, higher iron ore prices boost the Aussie economy.

Our resources analyst, Jason Stevenson, believes he’s found an equally important and often overlooked metal that will tag along as the iron ore price gains. You’ll find all the information here.

This week in Markets & Money

Vern kicked off the week discussing the consumer price index (CPI), and how our central bank is running out of wiggle room:

‘…The absence of inflation doesn’t mean that all household costs are falling. Some, like power costs and health insurance, are rising far faster than the CPI.

However, what it does mean is that wages growth is much harder to come by…especially in the private sector.

Discretionary spending — and that includes the ability to take on more debt — is under pressure.

‘…The last thing the banking system wants is for people to live within their means. The banks want — no, make that need — debt slaves.

‘…This is how the cycle goes.

‘…Central banks reduce interest rates to make debt cheaper (hoping to rekindle the debt-dependent economic growth model), but lower rates also reduce the income of conservative retirees (consumers).

Income-constrained and debt-burdened consumers…

We are caught in a vicious bind of our own making.

For more on this story, click here.

On Tuesday, Jason explained how the ‘Seven Year Itch’ was fast approaching for markets. Using charts going back to 1907, Jason explained how the Dow Jones Industrial Average has seen a significant market correction in every year ending in a ‘7’. This trend has been established for 110 years.

He warns, now we are in the second half of a year ending in ‘7’, investors should prepare themselves for a potential correction. But don’t panic, because the correction will create stock-buying opportunities along the way.

For more on this story, click here.

On Wednesday, Jason switched his focus to gold. He believes the final monthly closing price of the gold spot price could be the indicator that signals the next gold bull market is here. If this price point is confirmed, coupled with global political instability, we could be witnessing a new gold bull market about to begin. To find out why, you can read Jason’s full analysis here.

On Thursday, I discussed APRA’s latest regulation changes. Back in March, when the banking regulator announced new and tighter lending standards for the banks, APRA created a new problem. Tighter lending standards saw some people choose non-authorised deposit-taking institutions (ADIs).

Non-ADIs fall outside of APRA’s regulatory reach. So all the risky debt that APRA doesn’t want in the big banks is just shifted out and moved into that shadow banking sector, which APRA doesn’t regulate.

APRA is now pushing for change to ensure it can include the non-ADIs as part of its remit. But non-ADIs account for only 1% of the $1.6 trillion mortgage debt in Australia. Is chasing this market really worth APRA’s time?

For more on this story, go here.

On Friday, Vern explained why a 145-year trend is about to run its course. And why it’s likely to leave an unpleasant odour that lasts for a very long time. What is it? You’ll find all the details here.

Kind regards,

Shae Russell 

Shae Russell started out in financial markets more than a decade ago. Working with a derivative brokering firm, she helped clients understand derivative markets, as well as teaching them the basics of technical analysis. Since joining Port Phillip Publishing eight years ago, Shae has worked across a number of publications. She holds the record for the highest-returning stock recommendation, in which a microcap stock returned over 1,200% in six months. Ask her about it, and she won’t stop yapping on. For the past two years, Shae has worked alongside Jim Rickards as his Australian analyst, translating global macro trends for Aussie investors, and how they can take advantage of these trends. Drawing on her extensive experience, Shae is the lead editor of Markets & Money. Each day, Shae looks at broad macro trends developing around the world, combining them with her distaste for central banks and irrational love of all things bullion.

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