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Business/Finance See other Business/Finance Articles Title: RBA Says Commodity Rally Running Out of Steam and that Spells Trouble for Stocks! RBA Says Commodity Rally Running Out of Steam and that Spells Trouble for Stocks! Boris Schlossberg | Wednesday, May 4, 2016 at 4:30 pm Two of the biggest stories over the first four months of 2016 are very closely related: #1: The Fed’s dovish reluctance to raise interest rates, which has crushed the U.S. dollar and … #2: The astonishing rally in commodity markets that has been fueled in large part by the weak buck. First, the Fed’s quarter-point hike in the fed funds rate last December is beginning to look more and more like a “one-and-done” move. Since then, the Fed has blinked every time when it comes to normalizing interest rate policy. Markets don’t believe another rate hike is coming anytime soon. Second, as a result, the once-strong U.S. dollar has reversed course to the downside, with the Dollar Index falling to a 16-month low yesterday. This has helped propel commodity markets and resource stocks through the roof this year. Is the rally in mining stocks coming to an end? In fact, the S&P Metals & Mining Index has gained a stunning 51% year to date, and the S&P Oil & Gas Index isn’t far behind, up nearly 40% from its January low. So it’s clear that the magnitude of the surprising stock market rally since February is due in no small part to the stunning performance posted by commodity stocks. But is this rally sustainable? The Reserve Bank of Australia doesn’t think so. This week, the RBA cut interest rates by 25 basis points, taking the benchmark yield below the psychologically key 2% mark and sending the Aussie dollar tumbling below the 75-cent level. The RBA cited the strong appreciation in the Australian dollar and low level of inflation as key drivers for its decision and the move was clearly an attempt to stem the carry-trade flows that have poured into the Aussie in the wake of the Fed’s persistent dovishness. The Fed’s reluctance to normalize policy and signs of global economic slowdown have clearly changed the calculus for the RBA, which as recently as last month appeared to be content to keep rates stationary for the foreseeable future. The RBA noted that recent actions by Chinese policymakers were supportive of the near-term growth outlook but, privately, Australian policymakers must be worried that the latest rally in commodities is unsustainable. Chinese demand remains soft with the Caixin Manufacturing Purchasing Managers’ Index coming in at 49.4 vs. 49.8 eyed as it stays in contraction territory. The move today, therefore, was both a response to the weak U.S. dollar and an anticipatory attempt to ease credit ahead of a potential slowdown in growth in the second half of the year. “The RBA is the most market-sensitive central bank when it comes to commodities.” The RBA is the most market-sensitive central bank when it comes to commodities. Therefore, its actions speak louder than words. Many market commentators have made the argument that the recent rally in commodities has been nothing more than a short-covering “paper” rally. That actual demand for goods has slowed rather than increased over the past three months. The RBA rate cut last night may have just confirmed that analysis. If the rally in commodities is over, it’s likely to drag stocks down as well, as global economic slowdown concerns begin to seep into equity investors’ consciousness. Therefore, in 2016 “sell in May and go away” could very well be the strategy. Certainly the RBA thinks that it is a risk. Happy trading, Boris Schlossberg Post Comment Private Reply Ignore Thread
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