ASX to rise on clear outlook from US Fed iron ore surges
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Iron ore’s roller-coaster ride in 2021 shows no signs of easing, with prices ending an unprecedented slump to move sharply higher as investors monitor simmering debt troubles at China Evergrande Group.
The developer’s onshore property unit said it reached an agreement with yuan bondholders on an interest payment, offering some relief after fears over Evergrande’s financial stability sparked a global flight from risk. China’s central bank also boosted short-term cash into the financial system, helping steady commodity markets.
Iron ore prices climbed more than 16 per cent, surging back above $US100 a tonne from their lowest close in 16 months. Events around Evergrande spooked the market earlier in the week and the steelmaking material was already oversold, said Atilla Widnell, managing director of Navigate Commodities.
Iron ore prices are heading in the right direction. Credit:SMH
Still, analysts warn that China’s steel sector faces prolonged headwinds. The steelmaking ingredient, which was in the vanguard of this year’s commodities boom, has plunged 60 per cent from a record above $US230 a tonne in May. Curbs on steel output, alongside a property crackdown and concerns about a power shortage, have hammered iron ore demand in China.
“With a continuous rollout of energy-consumption curbs, mill maintenance works have been expanding, and volumes of construction steel in particular have slid massively,†said Haitong Futures analyst Qiu Yihong. Demand has also been disrupted by COVID-19 cases, bad weather, and broader weakness in property, manufacturing and automobiles, she said.
More pressureThe iron-ore demand squeeze could continue as China’s now mature steel sector faces further caps on production, which plunged to a 17-month low in August. Jiangsu -- a province with an economy as large as Canada’s -- has curbed electricity supplies to firms including mills.
As a consequence, iron ore will come under more pressure, falling to $US80 to $US90 a tonne heading into next year, said UBS strategist Wayne Gordon.
“This is probably the last hurrah in terms of that fundamental growth in steel demand,†ANZ Bank analyst Daniel Hynes said on Bloomberg Television on Tuesday.
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The Australian sharemarket is expected to open higher on Thursday, buoyed by gains on Wall Street after the Federal Reserve signalled it may begin easing its extraordinary support measures for the economy later this year.
In a statement issued early Thursday morning AEST, the Fed said it may start raising its benchmark interest rate sometime next year, earlier than it envisioned three months ago.
Fed chair Jerome Powell also said the US central bank will likely begin slowing the pace of its monthly bond purchases as soon as November if the economy keeps improving. It’s been buying the bonds to help keep long-term interest rates low.
ASX futures were up 17 points, or 0.2 per cent, at 7293 as of 6:15 am AEST, pointing to gains for local stocks when the market opens for trading.
Spot prices for iron ore jumped back above $US100 per tonne, rising 16.8 per cent to $US108.70, which boosted the US-traded shares of mining giants BHP and Rio Tinto.
The US Fed has clarified its tapering expectations. Credit:Bloomberg
The benchmark S&P 500 had jumped earlier for the first time in five trading sessions as concerns about China Evergrande Group’s debt woes eased. After the Fed meeting, Mr Powell also downplayed risks of market contagion from the implosion of the Chinese real estate giant, saying there was little direct US exposure to its debt and the situation “seems very particular to China, which has very high debt for an emerging economyâ€.
The S&P 500 closed 0.95 per cent higher at 4396, and on pace to break a four-day losing streak. It initially climbed to 1.4 per cent after the Fed’s statement. The other major indexes also received a bump, but shed some of their gains by late afternoon. The Dow Jones Industrial Average was up 339 points, or 1 per cent, to 34,259 and the Nasdaq also rose 1 per cent.
“The risk was that the Fed would announce tapering and a timeline today,†said Michael Arone, chief investment strategist at State Street Global Advisors’ US SPDR business. †I think that would have been an unexpected surprise that would have created some volatility and some negative reaction by investors, and that didn’t happen, and so investors are happy.â€
The yield on the 10-year Treasury note wobbled up and down after the Fed’s announcement, but wound up little changed at 1.30%.
“We expect further clarity in the coming months as the Fed divulges the details for tapering the bond purchase program and adjusts the pace of unwinding as they see fit,†said Charlie Ripley, senior investment strategist for Allianz Investment Management.
Good Morning and welcome to what should be another big day on Markets Live.
Emma Koehn and Colin Kruger are editing the blog today.
This blog is not intended as financial advice.
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