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Will Commodity Stocks Rebound in 2015 to Lift Index Markets?

If you believe in the theory that commodity price demand points to economic growth and a healthy economy, then the last two years have served to blow a rather large hole in that theory.

In fact, looking at commodity prices over the last two to three years, while equity markets have gone higher, commodity prices have done the exact opposite.

It’s therefore not that surprising that there is so little underlying price inflation in the world when we’ve seen widespread declines in commodity prices across the board, as well as a sharp decline in oil prices in the last six months.

Having said that, given the sharp rises seen since 2009 in commodity prices, these falls are more than welcome at a time when we haven’t seen much in the way of wage growth.

In essence, what we’ve seen in the last few months is simply a reversal of the income squeeze seen since 2009.Commodities Spread Betting

In my opinion that’s not a bad thing and is likely to act as a fiscal stimulus all by itself, in terms of lower input prices for companies and lower shop prices for consumers.

While it’s not such good news for the basic resource sector, it will likely make the sector much leaner in terms of cutting its costs for when prices start to tick upwards again.

The poor performance of commodity prices also helps explain the poor performance of the basic resource sector over the past 12 months.

This helps highlight why the FTSE 100 and the Australia 200 have underperformed a lot of their global peers in terms of stock market performance this year, due to the heavy weighting of both indices to the commodity sector.

2014 Saw Crude Oil Join in the Selling for Commodities

The Reuters CRB benchmark index of commodity prices is now trading below five year lows, down 15% on the year, and nearly 35% down from its 2011 all-time highs.

When we analysed commodity price performance just over a year ago in 2013, the best performing asset had been Brent Crude, which finished the year virtually unchanged, a little surprising given the geopolitical concerns surrounding this particular benchmark.

These concerns did initially carry over into 2014 with the multiple crises in Ukraine, Syria and Iraq helping underpin prices, but even then the absence of a significant push higher, given all these concerns, was starting to beg the question as to whether a sell off was only a matter of time. Spread Bet on Crude Oil

While stock market performance this year has been choppy at best with US markets once again leading gains to new record highs, European markets have struggled to keep up, with only the German DAX making new records, but even here these gains proved somewhat short-lived.

2014 has been pretty much a case of more of the same in the commodity space only this time it’s been oil prices that have plunged off the cliff, hitting their lowest levels since 2009, and down nearly 50% from their summer highs.

This oil price decline can partially be explained by concerns about a drop off in demand in emerging markets, as well as a slowdown in China as the economy there struggles against a backdrop of a slowing property sector and weaker export markets.

This weakness in the global economy has also translated into the rest of the industrial sector as copper, platinum and silver prices have also remained weak, also on the back of slower than expected global growth.

FTSE 100 Fails to Hit 7,000 as Commodity Stocks Weigh

Not surprisingly the weakness in commodity prices has seen the mining sector and the oil and gas sector take the largest hit and explains why of all the major benchmarks the FTSE 100 has underperformed its global peers.

The weakness has, once again, frustrated those forecasters who predicted we would surpass 7,000 this year.

It’s been quite hard to find a silver lining in the commodity space in 2014, with oilfield services providers being hit the hardest, with Tullow Oil down over 50% and Petrofac down over 40%.

Even amongst the blue chips of BG Group and BP the rise has been one of the rollercoaster variety, with BG down over 30% and BP down over 10%.

Royal Dutch Shell has been a beacon of stability for its shareholders, virtually unchanged from where it finished at the end of last year, testament to the reorganisation program currently being undertaken by its new CEO Ben Van Beurden.

Assuming that we are near a base in oil prices then there could be an argument for suggesting that some of the declines seen this year in the oil and gas sector might be overdone, particularly amongst some of the biggest losers.

It would still take a brave man to try and catch this particular falling knife though, given how sanguine Saudi Arabia appears to be about recent drops in the oil price, which would seem to suggest we could see further losses.

This continued disconnect between cyclical growth stocks and the wider market is one of the reasons why predicting the direction of market movements has been so difficult over the last few years, and could well remain so as we head into 2015.

For the first two years after 2009, copper and global equity markets moved in lock step with each other, before the correlation broke down at the beginning of 2011.

While the S&P 500 and DAX have made new record highs, the key question for next year will be whether they can continue to do so against a backdrop of a stronger US dollar, a tightening Federal Reserve and a European Central Bank that is likely to be hamstrung in further attempts to boost economic growth in the Eurozone next year.

Will Falling Oil Prices Provide an Economic Boost for the Global Economy?Trading on Global Markets

With global growth forecasts continuing to remain on the low side, the prospect of a pickup in demand for commodities probably remains less tilted to the downside than it did a year ago.

This is because given the declines we’ve already seen in the past two years, these lower commodity prices could well provide a fiscal boost for economies all by themselves.

Even so that doesn’t mean that we will necessarily see a strong rebound either as margins in the sector could well continue to remain under pressure as revenue expectations get revised lower, and GDP growth remains subdued.

With the Reuters CRB index now below its 2010 lows, the next key level comes in at the 2009 low that we saw just prior to the start of the Fed’s massive stimulus program in March of the same year.

This would seem to suggest that, while we could well see further declines in the short-term, we might be approaching a key support area for wider commodity prices.

Much will depend on the struggle between OPEC producers and non-OPEC producers for market share in an environment which is markedly different from twelve months ago, as the US shale revolution blunts OPEC’s ability to set prices to suit its own price agenda.

This isn’t likely to change in the near-term either, given the fact that Chinese demand is likely to remain weaker in 2015, while the economic recovery in Europe is also likely to remain fragmented given the political pot holes facing investors in 2015.

Notwithstanding the debate amongst ECB policymakers about how they can embark on a full scale bond buying program, we still haven’t seen the full effects of Russian sanctions bite properly yet, while potential elections in Greece, Portugal, Spain could have the potential to spook investors given the rise in support of anti EU parties in all of these countries.

Spread Betting & CFD trading carry a high level of risk to your capital and you can lose more than your initial deposit. Only speculate with money that you can afford to lose. These trading products may not be suitable for all investors so seek independent advice.

Content by Michael Hewson of CMC Markets

The contents on CleanFinancial.com including any articles or videos are for information purposes only and are not intended as a recommendation to trade. Nothing on this website should be construed as investment advice or form the basis of an of investment decision.

Neither CleanFinancial.com nor any contributing company/author accept any responsibility for any use that may be made of the above or for the correctness or accuracy of the information provided.

Content provided by CMC Markets. CMC Markets UK plc and CMC Spreadbet plc are authorised and regulated by the Financial Conduct Authority in the UK, registered offices, 133 Houndsditch, London, EC3A 7BX.

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Can the UK Construction Sector Rally in the Face of Rate Hikes and Political Bluster?

Over the course of the last twelve months, the UK construction sector has been the most buoyant section of the UK economy, posting 12 successive monthly PMI readings above 60.

However, as we head into 2015, there are some signs that we are seeing a bit of a slowdown.

Investors should keep a wary eye on the Bank of England in the event they shift position next year on a rise in interest rates, given MPC policymaker Ian McCafferty’s comments this morning.

As it is we’ve seen mortgage approvals start to decline from their peaks at the beginning of 2014 when we saw monthly borrowing come in at 72k a month, to levels just below 60k in November and their lowest levels since July 2013.

When looking at the most recent housing data, it has become apparent that certain measures introduced in April have served to take the edge off some of the recent gains in house price values, particularly in London and the South East.

The net result has been that the share prices of the major house builders started to slide back in mid-March.Spread Betting on Construction Firms

These measures were designed to try and mitigate the mistakes of the past and ensure that any new mortgage lending was affordable in the event interest rates were to rise unexpectedly.

To recap, the Mortgage Market Review are rules set out by the Financial Conduct Authority, to ensure that any new lending is affordable and that new borrowers had enough of a financial buffer to absorb a rise in interest rates, or a change in personal circumstances.

There was also a concern that some of the bad lending practices that led to the problems in 2007 were starting to resurface so the Bank of England announced in June that it was going to introduce new LTI (Loan to Income) caps at the end of that month, to help stem this problem, and sure enough this has prompted a further slowdown in mortgage approvals.

These do appear to be working given recent FCA data which shows that UK household appetite for high borrowing showing much slower growth in Q3.

House Builders Have Seen Strong Gains Since 2013

Since 2013, the share price performance of the biggest UK house builders has shown some strong momentum with Barratt Developments and Taylor Wimpey returning the biggest gains, their share prices up over 100%.

They have been closely followed by Persimmon, up over 90%, with Bovis Homes and Berkeley Group lagging behind both up over 40%.

It’s been a somewhat different story in 2014, where performance has been somewhat middling, not surprising given the gains since the end of 2012, as well as concerns about an interest rate rise.

However, there is also some evidence that the performance of the UK house builders has started to diverge, with Bovis Homes and Berkeley Group underperforming relative to the rest of the sector.

Berkeley Group have been particularly susceptible to the recent slowdown in high end house prices around the London area, and down 20% at one point this year.

Rally Pushes Barratt and Taylor Wimpey Back into the FTSE 100House Builder Share Trading

Barratt Developments and Taylor Wimpey’s share price performance has continued to impress though as these UK house builders continue their yoyo relationship with the FTSE 100, as they once again take their place back in the FTSE 100 and re-join sector peer Persimmon in the blue chip benchmark.

Barratt briefly dropped out of the index in the September reshuffle after declining sharply from its March highs but its share price rise since then has seen it regain its mojo.

Taylor Wimpey’s turnaround would appear to be well under way as it gets set to return after a multi-year absence, though its share price remains well below its 2007 peaks above 400p.

In its most recent trading update, Taylor Wimpey showed that margins were continuing to improve with housing price rises outweighing building costs.

This would appear to suggest that in terms of share price gains relative to its 2007 highs, that the potential for further upside is greater than some of its peers whose share price rebounds have already seen a retest of their 2007 peaks, Persimmon being a case in point.

2014 is Recovering After a Shaky Start

Even allowing for the gains seen in recent months, most of the major house builders still trade on fairly low forward P/E’s which suggests that investors remain a little reluctant to push back into a sector, that on the face it is likely to see a consistent demand for newly built properties.

At its trading update in June Persimmon was fairly conservative due to concerns about a lack of supply of available land.

However, in November the company changed its tune saying that it was fully sold up for 2014, and had £696m of forward reservations into 2015.

Barratt Developments stated that it was on track to deliver 15,000 house completions in 2015, after a very solid performance in 2014.

There are likely to be a number of reasons behind the reluctance to push some of these valuations higher starting with the fragmented nature of the recovery in house prices throughout the UK since the peaks in January 2008.

Election Concerns Giving Pause for Thought…UK Government and the Financial Markets

The looming UK general election next year, might well also be giving some investors pause, along with concerns about a possible rise in borrowing costs.

In addition, the recent stricter criteria surrounding mortgage availability is probably holding back demand, which could in the longer term, hold down selling prices in some areas.

There is another factor and it’s political in nature.

It’s been well documented that the opposition Labour Party have plans to implement a so called ‘mansion tax’ if they win in May next year, and this does appear to have introduced a short term cap on London prices in particular.

It’s not immediately apparent what type of trickledown effect a measure such as this might have on property values in the south east in particular, if implemented.

This uncertainty could well see some caution creep into investment decisions in the lead-up to next year’s poll date, though the recent stamp duty changes announced by the Chancellor this month, could well have lanced that particular boil, due to the way they disproportionately affect properties over the £2m mark.

This uncertainty appears to be reflected in the share price performance of Berkeley Group, given its exposure to London and the South East and the recent slowdown in prices.

The recently announced measures in the Autumn Statement, with respect to the stamp duty tax changes, could well see some adverse effects given the disproportionate effect they will have on homes with higher sale values.

There are still concerns that a new Labour administration could follow through on its pledge to reclaim land from developers on a use it or lose it basis, irrespective of the economic viability of the land at the time.

While most of this rhetoric was widely acknowledged as bluster from a party looking to score political points against the incumbent government, there is a remote concern that given its rather wretched economic record for competency, that Labour might consider doing it.

…But All Parties Want More Houses to Be Built

Putting that outlier to one side, one thing all the political parties do have in common is a desire to build more properties.

Given the low valuations of most of the major house builders, the outlook remains positive for future share price gains, particularly given that interest rate rises now look set to come later than initially thought six months ago, and the recent stamp duty changes look likely to act as an additional boost to the market going forward.

This fall in interest rate expectations has been largely as a result of continued falls in inflation and the slow rise in average incomes, though this could change in the coming months particularly if wages start to outstrip rising prices.

This paring back of rate expectations has seen the house building sector rally quite strongly since the lows in October.

Having said that, investors should always be prepared for a bumpy ride and be prepared to take a long term view, in what is traditionally a volatile sector, especially if interest rates start to look as if they might start to go up.

Spread Betting & CFD trading carry a high level of risk to your capital and you can lose more than your initial deposit. Only speculate with money that you can afford to lose. These trading products may not be suitable for all investors so seek independent advice.

Content by Michael Hewson of CMC Markets

The contents on CleanFinancial.com including any articles or videos are for information purposes only and are not intended as a recommendation to trade. Nothing on this website should be construed as investment advice or form the basis of an of investment decision.

Neither CleanFinancial.com nor any contributing company/author accept any responsibility for any use that may be made of the above or for the correctness or accuracy of the information provided.

Content provided by CMC Markets. CMC Markets UK plc and CMC Spreadbet plc are authorised and regulated by the Financial Conduct Authority in the UK, registered offices, 133 Houndsditch, London, EC3A 7BX.

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Has Brent Crude Made a Short-Term Base?

With slumping prices in the commodity markets, Michael Hewson takes a look at the potential for a bounce in crude oil futures and the likelihood of ECB QE being announced on Thursday.

  • Speculation over additional stimulus from the ECB and the PBoC has boosted US stocks and the DAX, though Michael believes that ECB QE remains unlikely at the this stage
  • Some are calling for Brent crude to drop to $40 per barrel, though support remains at $67.50 and we saw a key reversal pattern which may provide a short-term base
  • USD/JPY may struggle for further gains as it targets ¥120 as we reamin hugely above its 200DMA, with US jobs data on Friday expected to be key

 

Spread Betting & CFD trading carry a high level of risk to your capital and you can lose more than your initial deposit. Only speculate with money that you can afford to lose. These trading products may not be suitable for all investors so seek independent advice.

Video content by Michael Hewson of CMC Markets

The contents on CleanFinancial.com including any articles or videos are for information purposes only and are not intended as a recommendation to trade. Nothing on this website should be construed as investment advice or form the basis of an of investment decision.

Neither CleanFinancial.com nor any contributing company/author accept any responsibility for any use that may be made of the above or for the correctness or accuracy of the information provided.

Content provided by CMC Markets. CMC Markets UK plc and CMC Spreadbet plc are authorised and regulated by the Financial Conduct Authority in the UK, registered offices, 133 Houndsditch, London, EC3A 7BX.

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Political Uncertainty Ahead of General Election May Limit Potential for Sterling Gains

One of the biggest surprises in the first part of this year had been the outperformance of sterling against a basket of currencies, with the best performance coming against the higher yielding Scandinavian currencies.

A lot of this outperformance had been as a direct result of speculation that the Bank of England was on the way to raising interest rates as early as next year, and before the Federal Reserve.

This was on the basis of an improving economy, and continued falls in the rate of unemployment.

Such speculation saw the pound rise to its highest levels since mid-2009, in the middle of the summer, prompting concerns from business that the higher value of the pound was starting to impact on competitiveness.

In any event, these concerns have diminished significantly in recent weeks, as concerns about a slowdown in growth across the world, and the Scottish referendum caused investors to take profits on their recent sterling gains.

This, and a sharp fall in inflationary pressures, has prompted a significant paring back of expectations about a potential rise in interest rates, despite some dissent on the MPC about when to expect some tightening.

As a result, the pound has weakened in recent weeks after peaking at $1.7145 in July this year against the US dollar.

US Policy and the UK General Election Could Weigh on SterlingSpread Betting on GBP/USD

This recent weakness in the pound could gain traction in the next few months irrespective of perceptions about the future direction of UK interest rate policy for any number of reasons.

However, the two main drivers are likely to be the future path of US monetary policy, which at the moment could well see a tightening in the early part of next year, and the possibility of a change in the UK government at next year’s general election.

While UK GDP appears to be holding up fairly well, despite concerns about what is happening in Europe, the direction of the opinion polls ahead of next year’s election is likely to be a key determinant in how business views the direction of UK fiscal policy over the next few years.

With next year’s election outcome looking more and more uncertain, the emergence of UKIP and the SNP is likely to cause some businesses to defer important business decisions until after next year’s vote, which could well hit economic growth in the first half of next year.

A number of UK businesses have already expressed concern about some of the Labour Opposition’s more interventionist policy pronouncements on the energy sector, the banking sector, the housing sector and now the water sector.

We saw in 2010 how political uncertainty helped undermine the pound in the lead up to that election.

The pound similarly peaked just above $1.7000 in July 2009, before sliding sharply into the autumn period, and then rebounding into the year end, before sliding sharply as the election approached.

Concerns about political uncertainty are likely to be a similar story in 2015 given the current fragmentation in UK politics, and the rise of UKIP in England and Wales, and the SNP in Scotland, either of whom could well hold the balance of power in a new UK administration, and whose demands could well be not particularly business friendly.

While there are differences now, UK gilt yields in 2010 were well above 3.5%, and there was deep worry that unless action was taken to address the UK’s fiscal problems that we could see a run on the pound.

The head of the world’s biggest bond fund PIMCO even went as far to say that the UK economy and its debt were sitting on a bed of nitro-glycerine, and while the current situation doesn’t seem anywhere near as serious now, the underlying concerns about the UK economy have not gone away.

While the so-called ‘nitro-glycerine scenario’ appears to have passed, any prospect of a new government being anything less than serious about dealing with the UK’s many problems could well lead to increased uncertainty ahead of next May’s key vote.

This is especially pertinent given the toxicity of the two main parties, amongst some voters and the populism permeating into the UK political landscape.Sterling Currency Trading

Autumn Statement and Budget Unlikely to Offer Anything for Business

This week’s Autumn Statement and next year’s March budget are quite likely to be extremely political in nature, and are likely to offer little in economically tangible or positive terms, with respect to the UK economy, and the nature of the recent recovery.

With the polls likely to remain tight right up to polling day, and the two main parties haemorrhaging votes to UKIP and the SNP, the ensuing political uncertainty, as well as weak inflation, is likely to keep interest rates firmly on hold until well after next year’s vote.

This could well weigh on the UK economy as businesses hold off key investment decisions ahead of the outcome.

Given this uncertainty and the way the Labour Opposition is positioning itself in the context of its attitude towards business in general, it is hard to feel optimistic in any way about strong sterling gains over the next few months.

While we might see a small sterling rally into the year end, as we did in 2009, it is hard to see much prospect of one as we head towards next year’s general election, as politics outweighs economics as the main headwind for the UK economy in 2015.

Spread Betting & CFD trading carry a high level of risk to your capital and you can lose more than your initial deposit. Only speculate with money that you can afford to lose. These trading products may not be suitable for all investors so seek independent advice.

Content by Michael Hewson of CMC Markets

The contents on CleanFinancial.com including any articles or videos are for information purposes only and are not intended as a recommendation to trade. Nothing on this website should be construed as investment advice or form the basis of an of investment decision.

Neither CleanFinancial.com nor any contributing company/author accept any responsibility for any use that may be made of the above or for the correctness or accuracy of the information provided.

Content provided by CMC Markets. CMC Markets UK plc and CMC Spreadbet plc are authorised and regulated by the Financial Conduct Authority in the UK, registered offices, 133 Houndsditch, London, EC3A 7BX.

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Euro Sees a Rebound Despite Draghi Raising Disinflation Concerns

As Mario Draghi expresses concern over inflation, some in the markets are expecting sovereign bond buying, however, Michael Hewson points out the reservations of other Governing Council members.

  • EUR/USD is rebounding and needs to break above $1.25 to inspire a short-squeeze towards $1.26
  • GBP/USD is in a trading range and we may see a 150 point move if we break to either side, but importantly the dollar didn’t benefit from strong US GDP data
  • EUR/JPY highlights the battle of the central banks, with the pair surging as the BoJ wins, but technical signs may suggest we are set for a reversal

 

Spread Betting & CFD trading carry a high level of risk to your capital and you can lose more than your initial deposit. Only speculate with money that you can afford to lose. These trading products may not be suitable for all investors so seek independent advice.

Video content by Michael Hewson of CMC Markets

The contents on CleanFinancial.com including any articles or videos are for information purposes only and are not intended as a recommendation to trade. Nothing on this website should be construed as investment advice or form the basis of an of investment decision.

Neither CleanFinancial.com nor any contributing company/author accept any responsibility for any use that may be made of the above or for the correctness or accuracy of the information provided.

Content provided by CMC Markets. CMC Markets UK plc and CMC Spreadbet plc are authorised and regulated by the Financial Conduct Authority in the UK, registered offices, 133 Houndsditch, London, EC3A 7BX.

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