Weaker iron ore prices and nervousness about US politics are likely to constrain investor optimism this morning
Iron ore prices have resumed their descent after a brief pause. Many are forecasting a rally after the current winter slowdown in Chinese demand. However, potential buyers of mining stocks are likely to see discretion as the better part of valour at the moment. Weak demand and rising iron ore stock piles in China raise questions about how much further the iron ore price needs to fall before equilibrium is reached
The market has largely looked through last night’s developments in US politics. Reports that Republicans are considering a phased introduction of corporate tax cuts has the advantage of increasing the probability of getting some reform legislation passed. But it dilutes the near term benefit to smaller stocks. It also leaves open the risk that a future government will abandon planned cuts before they are fully implemented. Overriding all this is the possibility that current investigations into the Administration could make it more difficult to pass any reform legislation.
For markets, the net reaction to overnight developments in the US was to back away from the tax cut theme a little. The US Dollar eased and bond yields fell. This has seen the Aussie Dollar firm against $US, despite the drop in iron ore prices.
Woolworths’ sales report this morning will be a relief to shareholders after Coles disappointing data. Woolworth’s solid performance in Food and Liquor demonstrates it has regained its competitive strength now that price differences with Coles have been neutralised. In a difficult environment, Woolworths is benefitting from its range and from the efficiency of its supply chain. Investors will also be pleased with the first early signs of a turnaround in Big W. This provides visibility on the day when management might be able to consider the option of divesting this business.