Iron Ore Tests key Support But Refusing to Buckle

Onshore iron ore futures have held above key support levels this morning, having failed to break below the weekly pivot point at RMB 625.7.

Fundamentally vulnerable on the back of a global slowdown due to the COVID-19 pandemic, there is increasing bearish rhetoric regarding the performance of the world’s second largest traded commodity. 

Global stock markets have recovered some of their initial losses, but the S&P 500 index has stalled for the second time at the key 61.8% Fibonacci retracement. Meanwhile, the Bloomberg commodity index continues to languish near its lows as global trade has ground to a halt. However, iron ore futures have continued to defy expectations and remain one of the best global performing commodities.

Part of iron ore’s success is down to lower ex-Vale shipments and an increasing trade spat between China and the U.S. and Australian governments. However, in reality is resilience comes from expectations that the Chinese government will invest in infrastructure and support the economy.

Money supply is increasing, stimulus – compared to other developed nations at least – has been conservative, keeping market sellers on the sidelines as they wait to see how the world’s second largest economy will respond.

In a country where growth has been everything for nearly two decades, the big question is whether China will be prepared to unrealistically prop up over-inflated markets when the perfect opportunity to let them deflate (albeit slowly) to more manageable levels presents itself.

The rhetoric is building; iron ore futures are increasingly looking like a market anomaly and speculators are becoming impatient, suggesting the time value is starting to look limited and a correction is imminent.

Ed Hutton (FIS)