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
Some easing in metal prices during the week was consistent with further upward moves in the U.S. dollar.
The strongest oil prices in several months persisted with growing expectations that an agreement among some of the world’s largest producers would result in lower production and a faster re-balancing of the market than had been anticipated previously.
The presence of the US central bank in financial markets continued to affect decisions among U.S. investors.
Higher bond yields were an added weight by the end of the week on an equity market which remains relatively expensive based on the flow of earnings.
Despite the lengthy period of building expectations about a rise in the Fed Funds rate, U.S. financial markets still appear not to have adjusted fully to the change.
The pressures on yields increased after yet another speech by Janet Yellen in which she pondered the future conduct of monetary policy.
Central banks in Japan and Europe have been speaking more openly, too, about the limitations on their power after years of carrying the burden of trying to restore growth with only very limited success.
In speaking more openly about having to do more, Yellen has raised the prospect of the Fed being willing to allow inflation to rise beyond its 2% target. The prospect of a more inflation tolerant central bank worried financial markets enough for them to add an additional premium to yields.
The smaller end of the resources market, including gold stocks, stabilised after recent weakness but prices of the larger companies in Australia and overseas fell. Overall, though, the magnitude of price changes was not especially unusual.
The small resources segment of the Australian resources market has lost momentum and appears to have stabilised around 2014/15 values.
The greater preparedness to buy risk evident in the first part of 2016 appears to have given way to greater caution. Several indications, including the parallel loss of momentum among emerging markets stocks, say as much.
Market Breadth Statistics
