It started overnight with the equities and the iron ore coming under pressure. Fears about banking, the global economy, and the horror that we call the Pandemic.
However, this sell off feels like it might have more behind it. Since March, equities, iron ore, steel and base have shrugged of the global economic slowdown. The S&P 500 is up over 63%, iron ore has confounded the market by trading close to USD 130 a ton, whilst copper has rallied 57% from its low.
China has been a big factor, economic stimulus in infrastructure has seen steel consumption nearing record levels. The big question has been continuation, how can we expand whilst living in lockdown? Rising infections in Europe have signaled a second wave, suspect banking methods are back again, and bookmakers are not talking bets on Trump v’s Biden ending in a deadlocked supreme court.
Iron ore had stopped going up for some time, our technical reports highlighted the CNY 809 – CNY 805 break to the downside as being significant. Meanwhile the S&P 500 seems to have done the unthinkable on the 08 Sep. The index has made a lower low for the first time since the 13th of May. Lower lows are corrective at best, and bearish at worst, what they are not, is bullish.
Is this the end, almost certainly not? does this have the potential to be a sustained sell off? Potentially. DCE iron ore is CNY 240 above its 3-year average value, leaving it vulnerable to a mean reversion back to a CNY 500 handle. Likewise, the S&P 500 is over 400 points above its 3-year mean, seasonality charts would suggest this downside move could be nothing more than a 2 – 3 week sell off. But this is election year.
Should we talk about Trump v’s Biden?
Well, firstly, the greenback historically goes risk on for the next few months, but this is election year with an understaffed supreme court. Trump is desperate to get his pick confirmed before the election. There is 2 points in it, a second term really could be down to the courts. This could get ugly.
Ugly means uncertainty
For equities, volatility is potentially ahead. with the unknown signaling a risk off phase. For Iron ore and commodities, we have a potential bull dollar run if Trump holds onto power, as there will be no changing of the guard. This then means tough talk with China, Freedom for him to sanction at will and a potential economic slowdown their end. They may need each other, but it is fair to say that things are strained.
Challenging times for equities and ore alike as volatility looks like it could increase. A tense election with growing iron ore inventories, really is suggesting that the gravitation pull South is increasing. Careful with the falling knife, it could hurt if you try to catch it. Fortune may favour the brave, but the clever money will be waiting for the volatility to drop.
FIS Proverb – Success is surviving tomorrow, be mindful of the past and remember those who have served you well
(FIS)