Commodities crunch outweighs tech bounce – The Market Herald

A recession panic on commodity markets drove the Australian share market to its first loss of the week.

The S & P / ASX 200 declined 35 points or 0.52 per cent.

Resource stocks slumped amid fears of a collapse in demand as the global economy slows. Crude oil and other commodities fell overnight. Iron ore and copper slid today.

A rotation into battered tech stocks cushioned the market from a deeper loss. Property stocks, healthcare providers and the major banks also rose.

What moved the market

The gap between winners and losers was unusually sharp in a market buffeted by stiff cross-winds. Just three sectors declined, but the scale of those losses paired with their index weighting ensured the index finished in the red.

Energy, last month’s second-best performing ASX sector, dived 5.8 per cent. The heavily-weighted materials sector dropped 5 per cent. Utilities fell 1.2 per cent.

A retreat at the cost of borrowing boosted pockets of the market that rely most on borrowed money to fund growth. Defensive assets that compete with bonds for institutional fund flows also rose.

Today’s loss followed a brutal 24 hours on commodity markets as recession fears combined with a surging US dollar and a Covid outbreak in China to trigger a rush to the exits. The Invesco Commodity Index Tracking Fund in the US plunged 6.72 per cent to its fourth-biggest loss in 16 years.

Brent crude swooned 9.5 per cent overnight. US oil fell below US $ 100 a barrel. Copper, viewed by many analysts as a bellwether for global growth, dropped to a 19-month low overnight and fell nearly 5 per cent when trade resumed this afternoon.

Iron ore declined 3.7 per cent in Singapore today. Overnight, natural gas, gasoline, wheat, soybeans and precious metals also declined.

Australia’s export-driven economy is particularly exposed to shifts in commodity markets.

“Given the fact that the benchmark ASX 200 index is overweight on commodities, a continued decline in commodity prices may trigger a further correction in markets. Meanwhile, renewed fears of lockdown in China could also weigh on markets as Shanghai has recommenced Covid testing in mass, ”Kunal Sawhney, chief executive of research group Kalkine, said.

The flipside is that falling prices relieve inflationary pressures, which in turn may mean a shallower rate-hike cycle. The Reserve Bank raised the cash rate target by 50 basis points yesterday and is expected to lift again next month.

AMP’s chief economist, Shane Oliver, said there were early signs of a slowdown in the global economy, easing pressure on central banks to keep raising rates.

Slowing economic data globally, as highlighted by a decline in the US ISM index, signs that US core inflation and wage growth may have peaked and a continuing decline in our US Pipeline Inflation Indicator as upstream price pressures ease – with falling work backlogs, freight rates, metal prices and grain prices – are positive signs in that they suggest pressure may come off central banks later this year enabling them to ease up on the interest rate brake in time to avoid a recession, ”Oliver said.

Overnight, growth stocks led a strong intraday recovery on Wall Street. The S&P 500 finished 0.16 per cent ahead after falling more than 2 per cent in early action. The Nasdaq Composite led with a rise of 1.75 per cent. The Dow trailed with a loss of 0.42 per cent.

Winners’ circle

Growth was back in favor as the cost of borrowing as defined by the returns paid by bondholders continued to back down. The yield on ten-year Australian government bonds fell 15 basis points to a five-week low.

Similar moves in the US fed strong gains in Big Tech overnight. Tech and other growth areas of the market are particularly susceptible to changes in the cost of borrowing because their valuations depend mostly on projected future earnings.

Some of FY22’s worst performers were today’s best. Zip Co, which lost 94 per cent of its market capitalization last year, bounced 12.75 per cent. PointsBet recouped 3.64 per cent. The wagering group dived 79 per cent last fiscal year.

Megaport soared 14.03 per cent. Life360 gained 13.89 per cent. EML Payments added 10.51 per cent. Xero rose 6.65 per cent, Altium 4.14 per cent and Afterpay parent Block 4.47 per cent.

Healthcare and other recession-resistant defensive assets also rose. CSL gained 2.58 per cent, Cochlear 1.56 per cent and ResMed 2.82 per cent. Supermarkets Woolworths and Coles put on 2.51 and 1.67 per cent, respectively.

The big four banks gained between 0.84 and 1.81 per cent.

Doghouse

Resource stocks slumped as the US dollar index neared its highest level in two decades. The index measures the greenback against a basket of foreign currencies. A strengthening US dollar raises the cost of dollar-denominated commodities for holders of other currencies.

Beach Energy skidded 8 percent. Woodside Energy shed 6.91 per cent. Santos gave up 6.15 per cent.

Diversified miner South32 sank 7.53 per cent. Champion Iron lost 8.65 per cent. Big guns Rio Tinto and BHP shed 7.35 and 5.6 per cent, respectively.

Gold miners wilted after the yellow metal smashed through the US $ 1,800 an ounce level.

“Gold blew through 1800 with apparent ease which itself suggests big stops were triggered. And there could be more pain ahead for gold bugs, ”City Index senior market analyst Matt Simpson said.

“That the ‘gold VIX’ (GVZ) rose to a 3-week high and prices are already down 2% this week suggests margin calls are being attended to, as gold is clearly not behaving like any sort of safe haven.”

St Barbara shed 9.5 per cent, Sandfire Resources 8.35 per cent and Newcrest 6.62 per cent.

Bubs Australia eased 3.1 per cent to 61 cents after raising $ 40.1 million from institutional investors at 52 cents to fund expansion. Retail shareholders will get the chance to buy at the same price.

GrainCorp slid 6.78 per cent as its shares traded without the right to the latest dividend.

Other markets

Asian markets faded as the threat of further lockdowns in China weighed. The Asia Dow shed 1.2 per cent. China’s Shanghai Composite lost 1.55 per cent, Hong Kong’s Hang Seng 2 per cent and Japan’s Nikkei 1.04 per cent.

US futures tracked Asian equities lower. S&P 500 futures were recently down 14 points or 0.37 per cent.

Volatility in energy markets continued with a rebound in oil. Brent crude bounced 49 US cents or 0.5 per cent to US $ 103.26 a barrel.

Gold added to its overnight loss. The yellow metal dropped US $ 2.70 or 0.15 per cent to US $ 1,761.20 an ounce.

The dollars faded 0.11 per cent to 67.86 US cents as the sell-off in commodities continued today.