Oddly the opposite message was around yesterday with Chinese and Hong Kong stocks jumping 2.6% AND 5.2% on “speculation policymakers are making preparations to gradually exit the Covid zero policy”. The newswires talk about “unverified social media posts” that a committee was being formed to assess scenarios on how to exit the COVID zero policy. You can see the drop and pop in the daily and iron ore price in the chart below.

It’s all rather short-term stuff but it is good. The iron ore stocks are setting up for a fabulous buying opportunity. A COVID pivot might start it but there are so many bigger issues facing iron ore. Global recession for instance. We continue to wait for the pivot. We do not have to catch the very bottom. A few social media posts is not enough. And even if they declared an end to COVID zero, would that pivot the whole iron ore sector in the long term. Unlikely. So the message is that whilst there may be a short term trade from this very oversold position, the big game is timing a ‘long duration’ trade in iron ore. Technically we’re not there yet. So watching not buying. For those of you who are more nimble and who want a trade, don’t bother with BHP, use FMG. SIDENOTE – This is an iron ore sell-off. The other commodity prices, whilst going nowhere have not been so precipitous, and this sharp sell-down is not really noticeable on the ASX 200 Resources sector chart. This is iron ore, not resources. FMG is your stock to trade. BHP will come later. For the record:

• FMG is 100% iron ore.
• BHP is 47% iron ore, 26% copper and 24% coal.
• RIO is 62% iron ore, 20% Aluminium, 12% Copper.

 

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SOME CHARTS

 

RESOURCES SECTOR CHART

 

METAL PRICES

QUESTION - What do all these charts tell you?

ANSWER - That the commodity markets are setting up for a global recession. It's all part of the cycle. At some point, the cycle will bottom (not today), and there will be a great buying opportunity. That's what these charts tell you.

Two bullet points:

• A quirk of the sector from experience is that BHP and RIO do the opposite of what is fundamentally logical - they are a sell on a PE of 6x and a yield of 16% and a buy on a PE of 60x and a yield of 0.6% (not quite those numbers but you get the idea).
• When the Aussie dollar goes up, buy Australia, buy commodities and buy resources stocks. It is a commodity currency, we are a commodity-based economy, and when the Aussie dollar goes up, global fund managers want to catch the Australian wave in the currency and commodities and invest. As you can see below - we are set up for a great "Buy Australia" pivot point. We probably need to get over our global recession fears, but with bond yields coming off the top (economic relief) the currency markets are beginning to detect a bottom.