Commodity rallies impact equity trading.
It appears that the advance in U.S. equity markets that started back in March may be starting to encounter significant headwinds. This week, the NASDAQ 100 (NDAQ100 CFD) failed to break through the 2,000 level, while the Dow Industrials (US30 CFD) were unable to hold above 13,000 and the S&P 500 (SPX500) failed to hold above 1,400. Today, indices have continued to decline and could see some pressure ahead of the weekend, particularly with the Dow Industrials dropping back through their key 12,800 level. Based on this, a lower close today may suggest that a near-term correction in the U.S. may be underway. In Canada, meanwhile, the S&P/TSX 60 continues to trade above yesterday’s 860 breakout point, suggesting that underlying support remains intact.
It appears that what may be overhanging U.S. sentiment and propelling Canadian equity markets higher may be commodity price action. Crude oil broke out to another new high today and traded above $125/bbl at one point. Meanwhile, agricultural commodities have been on the move with soybeans up 3% and rough rice up 5.1%. This suggests that consumers and corporations may continue to face increasing inflation in these areas. Rising inflation based on commodity prices could affect equities in two ways. First, higher food and transportation costs could force consumers and companies to reduce spending in other areas. Second, rising inflation may make it difficult for central banks to reduce interest rates and could force them to raise rates earlier than economic conditions would normally suggest, which could slow a potential recovery. Because of this, it is possible that U.S. indices could pull back to test recent support levels such as 1,825 for the NASDAQ 100, 1,325 for the S&P 500, and 12,200-12,275 for the Dow Industrials.
Canadian share update: results drive miners in different directions, ACE Aviation takes off
Production and financial results released last night seem to have sparked significant moves in the Canadian mining sector today instead of commodity price changes. Breakwater Resources (TSX: T.BWR, Bullboard) dropped 16.4% today after the base metal producer reported a $6.9 million loss in Q1 F2008, down from a $15.3 million profit a year ago. Management blamed the decline on a 30% decrease in the zinc price, higher costs, and a higher Canadian dollar.
On the other hand, Gammon Gold (TSX: T.GAM, Bullboard) jumped 2.6% after announcing that from December to April, monthly gold equivalent production grew 48% to 24,194 ounces, cash costs have fallen 36% to $481/oz and free cash flow has turned positive at $0.6 million versus a $4.7 million outflow in December. Meanwhile, Thompson Creek (TSX: T.TCM, Bullboard) advanced 3.1% after reporting EPS of 37 cents for its latest quarter, well above the 22 cents Street estimate. Thompson Creek maintained its production guidance of 23.0 million to 24.5 million pounds of molybdenum for this year. Finally, Fording (TSX: T.FDG, Bullboard) moved up 1.5% after indicating that based on completed contract negotiations, it expects its coal price to average US$275/tonne in the year ending March 31, 2009, up from US$93 last year.
In other sectors, ACE Aviation (TSX: T.ACE.B, Bullboard) has climbed 8.7% today. Although the company posted a $180 million loss primarily due to charges, its revenue increased by 3.8% over year to $2.7 billion. Also, its Aeroplan (TSX: T.AER, Bullboard) subsidiary announced plans to convert from an income trust back to a traditional corporate structure. On this news, ACE broke out of a downtrend and could climb to retest resistance near $25. Aeroplan, meanwhile, appears to have completed a double bottom near $15 and may test resistance near $18.50 in the near term.
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This commentary is based upon technical analysis. Technical analysis is the study of price and volume and the interpretation of trading patterns associated with such studies in an attempt to project future price movements. Technical analysis does not consider any of the fundamentals of an underlying company, and as such is inherently uncertain and should not be the only factor considered by an investor in making an investment decision.
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