US stocks higher Friday night, Aussie dollar edging higher, iron ore disappoints, ASX futures down 5 points

The benchmark iron ore price only fell by 10c to US$45 on Friday night, but I think the focus will be more that it didn't bounce. On the one hand there is so much pessimism built into iron ore miners and services associated with them that any fresh panic is unlikely to surface; but on the other hand any proxies for Chinese economic health are under the microscope as optimists look for signs of life in Chinese GDP growth - so we are a bit sensitive to fresh news at the moment.

There is much being made of falls in the price of shipping manufactured goods at present, with the Baltic Dry Index falling to a level of below 500 last week. This is reflecting two things: first, slowing imports/exports from China have been putting less demand on shipping services; and probably more importantly--and more likely to be overlooked--is the fact that way too much shipping infrastructure supply has been created over the past 10-15 years and now the seas are awash with overcapacity to handle goods.

While it's very easy to create alarming headlines about the Baltic Dry Index (it's level was above 10,000 pre GFC and now sits at 498), the reality is that this is a volatile measure and just like lower iron ore prices and oil prices have been necessary evils to scale back production in those markets to cater for a subdued trade environment, so too is the reality that ship builders and owners must face. So while it is likely that Japan's latest recession and the commensurate downward pressure in shipping markets will have taken the wind out of the sails of the ASX 200 night futures on Friday, I would say that the majority of the headlines attributed to this dynamic are alarmist and a little superficial in their analysis. A low Baltic Dry Index does not mean that Australia is shipping less to China and Japan, rather it means that there is an abundance of shipping availability for those goods. Operating updates from Australian mining firms will likely prove far more useful than this particular measure.

All of that aside, the level of the ASX 200 (first chart) is looking fine at 5,256, the US dollar remains close to 100 (and may see higher levels coming into and around the December US rate rise), and the Australian dollar continues to trade higher at US$0.7228 as I write.


Source: Rivkin, Saxo Bank

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This article was written by Scott Schuberg, CEO of Rivkin Securities Pty Ltd. Enquiries can be made via info@rivkin.com.au or by phoning +612 8302 3600.

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