Mining Stocks Rally, But Does a 'Bull Trap' Lie Ahead?
February 05 2016 - 12:56PM
Dow Jones News
By Scott Patterson
LONDON--Mining stocks, the market's punching bag of 2015, are
the darlings of 2016--so far.
Shares of battered miners such as Anglo American PLC, BHP
Billiton Ltd. and Glencore PLC have surged in recent days,
propelled by a rally in commodities, a weakening dollar and a
glimmer of hope that demand in China will pick up in 2016.
The question for investors is whether the rally is what traders
call a "bull trap"--a brief bounce before another dive into the
red.
Analysts said there is cause for hope but cautioned that it
would be some time before the coast is clear for investors.
"I'd be brave to say this is the real thing," said Chris
Beauchamp, senior market analyst at IG Group.
A bounce in commodity prices has driven the rally. Iron ore,
which tumbled 40% in 2015, has gained 14% since mid-January. Copper
prices, which hit their lowest levels since early 2009 in
mid-January, are up 10%.
There are indications that demand could pick up in China,
despite annual growth at 6.9% in 2015 being the slowest in a
quarter century. In December, China posted a 26% annual rise in
imports of unfinished copper and products, the second-highest
monthly figure on record, according to the Chinese customs
authority.
Glencore Chief Executive Ivan Glasenberg has said Chinese
demand, while not piping hot, would remain robust. Hedge funds and
other bearish traders have used their financial muscle to
artificially push commodity prices down, he has said. "In the end,
the fundamentals will prevail," Mr. Glasenberg said at a London
conference in October. "Demand is still there."
Mining stocks plummeted in 2015, one of the worst years on
record for the industry, amid a slowdown in demand from China and
elsewhere. A glimmer of hope about China and global growth could
signal a bottom for commodities and mining stocks, Sanford C.
Bernstein analyst Paul Gait said in a Friday note. "[A]ny return to
global growth...will have a profound impact on commodity prices,"
he said.
Miners continued to grind higher Friday. Anglo American, up as
much as 24% Thursday, gained 12% more in London trading, leaving it
up 22% for the year but still down 69% in the last 12 months.
Glencore, down 61% in the last year, added 4%, putting it up 14%
year-to-date. Anglo-Australian mining giant BHP rose 5%, but it
remains 9% in the red for 2016 and down 45% in the past 12
months.
The drag on the dollar due to fresh jitters about the strength
of the U.S. economy has helped power mining stocks higher. The WSJ
Dollar Index, which compares the dollar against a basket of 16
commonly traded currencies, on Thursday hit its lowest level since
early November.
The dollar's weakness has helped fuel the bounce in commodities,
which are typically bought and sold in dollars. Because it takes
more dollars to buy a barrel of oil or a ton of copper, prices
naturally go higher. Conversely, the strong dollar in 2015 helped
push commodities lower, punishing mining stocks.
Gold stocks have also been on a tear, powered by a rally in gold
prices also helped by the weak dollar. The precious metal on
Thursday climbed to $1,157.50 an ounce on the New York Mercantile
Exchange, its highest level in three months. Canadian miner Barrick
Gold Corp., the world's largest gold miner by output, has surged
50% year-to-date. Newmont Mining Corp. and Randgold Resources Ltd.
are up more than 25% this year.
Some analysts cautioned that the rally could be a false dawn.
While certain copper imports shot higher in December, they fell
2.2% overall in 2015, their third straight year of decline.
Meantime, global refined supply of copper rose 1.8%, according to
the International Copper Study Group.
Commodity prices haven't fallen far enough to drive out enough
supply to create a sustained advance in prices, Investec analysts
said. "We need a sustained period of disincentive pricing to
balance the commodities market and thereby stabilize the sector,"
Investec said in a Friday note.
There could also be some short-term factors behind the rally.
Traders for the past year have said a new breed of powerful Chinese
hedge funds have been making huge wagers that commodities will
fall, dragging on prices. The Lunar New Year starts next week and
is likely causing some of those Chinese hedge funds to close out
those bets because many traders won't be able to monitor their
positions while on vacation. That could give commodities some room
to advance, SP Angel said in a Friday note.
That means when the bearish hedge-fund traders return after the
new year festivities are over, they are likely to pile in again,
potentially pulling the rug out from under commodities--and mining
stocks.
Write to Scott Patterson at scott.patterson@wsj.com
(END) Dow Jones Newswires
February 05, 2016 12:41 ET (17:41 GMT)
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