Commodity Rout Deepens. Risk is off

Commodity Rout Deepens. Risk is off
by Brenda Kelly

We can grasp at straws and look for the positive in the Chinese trade balance data but at the moment a small boot in domestic demand is not going to help commodity prices and that is where the focus currently lies.

European indices have taken the baton from their Asian counterparts and all trade lower as oil, copper and iron ore continue to weaken exacerbated by the stronger greenback.

In Japan, the growth in the 3Q beat market expectations; the Japanese GDP expanded by 1.0% q/q annualised (vs 0.2% exp. & -0.8% last). The USDJPY traded within 123.00/40 in Tokyo as Japanese firms said foresee the yen weakening to at least 125 next year. Sharp declines in oil and commodity shares have ultimately negated any positivity that the economy had dodged a recession in the third quarter.

Once again the main FTSE theme is the mining sector this morning. In what must be the worst kept secret ever, Anglo American (-3.5%) has suspended its dividend. Investors have shown their ire towards this decision as the stock trades to even deeper all-time lows. Risk off looms large with oil and basic resource stocks under pressure while defensive sectors like telecommunications and consumer staples attracting the bulk of what is exceptionally muted investor appetite.

Copper continues to look soft and the downside seems set to continue owing to the weakness in China (the world’s largest copper consumer), the strong US dollar and low cost copper producers continuing to flood the market in order to maintain a semblance of cash flow. Until we see a realistic cut in production or a hike in Chinese demand for the metal it will be difficult to call a bottom in the price.

Glencore – 4.07% near the bottom of the index, Glencore is unable to catch a break and given its extreme move below the £1 marker it will be difficult to clamber back with commodity prices as pressured despite the plans to cut output and jobs.

Another signal that investors are on the defensive is the fact that tobacco stocks are marginally higher on the day with BAT +0.47% adding 1.3 points to the FTSE while Imperial Tobacco has risen 0.65%

ROLLS ROYCE (-1.88%) DOWNGRADE to UNDER-PERFORM at Bernstein M-P) PT 515p (602p)

Serco Group (-2.47%) Trading update outlines a strong 2015 whilst also highlighting the difficulties in the turnaround. The FTSE250 firm expects profits to disappoint next year as the sale of its business processing outsourcing unit is expected to hit to groups revenue in 2016 dragging trading profits down to £50m

Rio Tinto PLC (-2.98%) rated a buy at Citi – which is the singular bravest ratings upgrade I’ve seen in a while.

Mondi (-4.23%) cut to underperform at BOFA.

Betfair Group (+0.42%) Nomura has upgraded to Neutral with a price target of 3450.00p

Morrison (+0.69%) raised to hold from reduce at HSBC despite the relegation to the FTSE250 recently.

Marks & Spencer (-1%) is cutting its capital spending to less than 550 million pounds ($831 million) a year, after its expenditure totalled 2.9 billion pounds over the four years to 2014/15. This spending did not improve sales density, which continues to fall even though food makes up a higher percentage of the sales mix.

Sainsbury (+0.62%) a new Chief Customer Officer and a rating upgrade form Stifel is keeping the stock higher this morning.