Commodity Stocks Bounce Back as Gold Stabilises

Commodity Stocks Bounce Back as Gold Stabilises|
By Brenda Kelly

Asian equity markets made a bearish start to the week following 0.3% y/y drop in Chinese industrial profits on weak commodity prices and slowing activity. Shanghai’s Composite lost more than 5% and fell below 4000 mark (at the time of writing), Hang Seng index wrote-off 2.65%. The BoJ DepGov Nakaso is said to be watching the impacts of tighter Fed policy and the subdued fundamentals in China. BoJ will adjust policy if needed, he said.

With earnings season in full swing, there will be a host of trading opportunities in the UK equity space with some of the large banks set to report H1 earnings this week. Given that the jury remains out on which bank will race to normalizing interest rates first; key preliminary GDP data from both the UK and the US will likely add fuel to the ongoing speculation. By contrast, the RBA may well, in the face of the present commodity rout emit more dovish noises in respect of Aussie strength.

With even the man and his dog on the street declaring their bearishness on gold, the key level being the $1089/oz, seems to be providing a buying area and has sent the precious metal back through the $1100/oz mark today. Technically, a short squeeze seems likely but much will depend on the FOMC later this week.

UK commodity stocks are on top this morning with profit taking and a degree of stability in gold prices aiding the climb higher and allowing the FTSE to outperform its European counterparts in early trade. Markets were not expecting a beat on the German IFO print this morning but clearly the easing of the Greek debacle has engaged stronger faith in the German economy. Nevertheless, the better than expected German IFO in has failed to temper the burgeoning strength in the single currency which punctured the $1.11 marker this morning. The annual growth rate of the broad monetary aggregate M3 stood at 5.0% in June 2015, unchanged from the previous period. The narrower aggregate, M1 money supply increased in June while the annual growth of credit to euro area residents increased 1.2% in June too. Inflationary tendencies may well be staging a comeback in the near future. We can probably expect to see one of the ECB ‘sources’ on the newswires shortly in a bid to talk down the euro.
All DAX sectors are in the red with financials the worst hit. Deutsche Bank (-2.67%) never too far away from a scandal is once again in the headlines, this time an alleged tax fraud related to eight of its employees is now under investigation.

Equity Highlights:

Randgold Resources: (+3.42%) The company has reported that it is making excellent progress in relation to Ivory Coast assets with the recovery rate at its Tongon mine improving and likely allowing an increase in capacity. Despite the recent falls in the gold price, the identification of a new bulk mining target is also helping to shore up the share price this morning.

Merlin Entertainment (-6.5%) Off the lows, but the profit warning this morning should come as no surprise. The roller coaster incident in June has naturally affected trading this summer. EBITDA for the resort is now seen at £40-50m against the £87m back in 2014.

Pearson (-2.3%) Determined to exit the business publishing arena, Pearson now looks to offload the 172 year old Economist magazine. This publication was initially excluded from disposal but with plans to ramp up the education business, the sale might allow Pearson to make good on the lost testing contracts recently.

Reckitt Benckiser (+1.79%): The share price looks to challenge the 52 week highs today and is now very close to the average broker target price of 6011p. A leap in pre-tax profit to £912m from £838m last year coupled with an ahead of expectations like-for-like revenue of 5% (constant currency basis).

Ryanair (-2.12%): The airline is very upbeat about passenger numbers and expects FY profit to be at the higher end of guidance. Passenger numbers will grow to 103 million this year from 90.6 million last year.

US Durable goods orders are on the docket today. Given that the jobless claims last week tends to upset the apple cart in respect of some of the more hawkish viewpoints, this metric may throw more light on what will come next from the FOMC. Volatility in the transport sector has permitted many to ignore the headline figure but manufacturing has definitely slowed in the past quarter.

The Dow is slated to open up 15 points at 17583.