MINERS: WHERE DO THEY GO FROM HERE?

CLOSING SHORT MINERS

The dollar has rallied and china tightened as we expected but commodities and miners don’t care. So it is time to step aside. Closing RIO +0.65%. AAL -0.76%

 

MINERS: WHERE DO THEY GO FROM HERE?
SHORTING RIO & AAL

Wednesday • 18th October 2017 • 15:54

Sector +25% since mid June. Number of drivers; sector cheap vs the market, China capacity cuts at the same time as a pickup in global growth creating a demand and supply imbalance into the Plenum taking place this week. All turbo charged by a weaker dollar. But where from here?

It is tough to argue that the sector is expensive. Double digit FCF yields are attractive in a market context. But given the run, stocks are vulnerable to profit taking here. The Plenum looks to be passing with a whimper. No mention of a growth target, focus on quality growth (away from industry and towards tech) and reiteration of housing as for living not speculating in could all be interpreted as -ve commods. The conclusion was always likely to be that growth has been supported into the event, and that deleveraging is more likely to occur this year after it.

At the same time we have US data blowing the lights out, rates and the USD turning as a result, and the possibility of a more hawkish fed chair to be announced in the next 2 or 3 weeks, removing another tailwind.
We think the sector looks vulnerable, principally bulk commods as China follows through on steel curbs through the winter months.

We will be shorting RIO and AAL as they look like the best shorts to us.
TRADING BEAR.