Daily roundup of research and analysis from The Globe and Mail’s market strategist Scott Barlow
Investors increasingly cornered
Scotiabank strategist Simon Fitzgerald-Carrier emphasized fewer places to hide for investors as the conflict in Iran drags on,
“As the conflict in Iran enters its fourth week, investors are increasingly piling into cash and money market funds, as the surge in oil prices reignites fears of rising inflation. The longer oil prices remain elevated, the greater the risk to both inflation and economic growth, thus explaining why stocks and bonds are being hit simultaneously. ... Unfortunately, gold has also failed to play its traditional safe-haven role, with bullion now down roughly 16.5% and gold stocks dropping even more since the start of the war. ... While the lasting effects of this conflict remain highly uncertain, we continue to stress that a resolution in the coming weeks could propel equities sharply higher. The economic backdrop prior to the conflict was very constructive, and the elevated level of cash on the sidelines could further reinforce such a move.”
Copper sentiment goes south
The immediate future for copper miners is suddenly less rosy, according to RBC Capital Markets analyst Sam Crittenden,
“Our view: Copper prices fell ~5.8% last week as the war in the Middle East raged on, threatening to stoke global inflation and hamper growth for the foreseeable future. Copper equities faced a double headwind: broader risk-off sentiment compounded the impact of falling spot prices, copper equities were down -9.6% w/w. Interestingly, Shanghai copper inventories fell 5.15% w/w last week, marking the first meaningful reversal after climbing 310% over the preceding six months. This decline likely reflects demand from buyers who had been priced out of the market during the rally, now stepping in as recent price weakness has created more attractive entry points. This suggests that despite the current risk-off sentiment and geopolitical headwinds weighing on global copper prices, underlying demand dynamics remain intact. Gold and silver prices also took a left turn, falling -10.5% and 15.7% w/w, respectively. ... We remain positive in the copper space as Trump’s productive talks rhetoric, even amidst Iranian denials, revealed strong demand for positive headlines for geopolitical resolution … We refreshed our FCF Yield sensitivity analysis of producers under coverage to different copper pricing scenarios. FCF yields are compressed at $4 copper, turning negative for some of the producers as elevated capex cycles kick in to address the forecasted supply gap. The picture improves materially at the $5 copper level where yields stabilize. HBM [HudBay Minerals] stands out as a relative outperformer, insulated from copper price sensitivity by substantial by-product credits that bolster cash generation across the pricing spectrum.”
LNG outlook upgraded
Morgan Stanley analyst and commodity strategist Devin McDermott upgraded his outlook for LNG prices for Iran-related reasons,
“Earlier this year, we moved our industry view to ‘Cautious’ and adjusted our outlook on LNG exposed equities to reflect a market entering a period of oversupply — a theme we have discussed for the last few years. ... Recent events in the Middle East (including damage to the Ras Laffan LNG complex) change the macro outlook, creating a large shortfall this year and mitigating oversupply risk in 2027-28.
Alongside this shift, we are moving our base case price targets for Cheniere and Venture Global near prior bull cases to reflect better margins and growth prospects, upgrade Cheniere to Overweight (from Equal-weight), and double upgrade VG to Overweight (from Underweight). We also move our sector view back to In-Line (from Cautious).”
The upgrade has clear positive follow-through for domestic LNG producers to varying extents. Access to global markets through LNG Canada is also a major driver of domestic LNG producer profits along with the commodity price.
Diversion
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