The Current View
A lengthy downtrend in sector prices had given way to a relatively stable trajectory after mid 2013 similar to that experienced in the latter part of the 1990s and first few years of the 2000s.
The late 1990s and early 2000s was a period of macroeconomic upheaval during which time sector pricing nonetheless proved relatively stable. That remains a possible scenario for sector prices.
Relative stability suggests a chance for companies genuinely adding value through development success to see their share prices move higher. This was the experience in the late 1990s and early 2000s.
The lower equity prices fall - and the higher the cost of capital faced by development companies - the harder it becomes to justify project investments.
Has Anything Changed?
A 1990s scenario remains the closest historical parallel although the strength of the US dollar exchange rate since mid 2014 has added an unusual weight to US dollar prices.
The first signs of cyclical stabilisation in sector equity prices have started to show. This has meant some very strong ‘bottom of the cycle’ gains but only after prices have already fallen by 70% or more in many cases leaving prices still historically low.
Funding for project development may have passed its most difficult phase at the end of 2015 with signs of deals being done and evidence that capital is available for suitably structured transactions.
Key Outcomes in the Past Week
U.S. market indices again set new records. All three major stock indices reached new peaks on the same day for the first time since 1999.
Supportive monetary policy settings in the absence of destabilising political or economic events continue to facilitate strong markets.
Oil prices moved higher last week as a series of influences worked in the same direction. The Saudi oil minister hinted at the possibility of price stabilisation measures. OPEC officials raised the possibility of production constraints when they confirmed a planned meeting of members in September. The International Energy Agency referred to crude inventories possibly contracting by year end.
The US government reported unchanged retail sales in July had grown by only 1.9% over the preceding 12 months.
The slowing growth in retail spending could be
construed as a worry and may yet loom as a
larger
concern with personal consumption spending accounting for two-thirds of US
GDP.
Market traders appeared content, at least for the time being, that the main market influences are well balanced. The retail sales numbers were taken as evidence that the Federal Reserve would maintain its monetary support for markets rather than as an adverse impact on growth.
Resources stocks at the smaller end of the market showed signs of retreating, led by gold related equities. The gold sector is now sitting on a negative return for the past four weeks after a gain approaching 150% over the prior 12 months.
Reflecting movements across a broad range of risk assets, iron ore prices traded higher. At more than $60/tonne, the iron ore price has returned to early 2015 levels.
All the major mining commodities - base metals, coal and iron ore - have now shown signs of recovery from the worst of the cyclical downturn at the end of 2015 when fears about deteriorating global growth were at their most intense.
Market Breadth Statistics
