Shock and ore
A few choppy trades for iron ore after Lunar New Year, but what a bonus for company profits, tax receipts, and the Federal Budget!
This gives a marginally resurgent Coalition ample headroom for income tax cuts to be announced ahead of the looming Federal election (which will largely boil down to tax policies and the ubiquitous 'boats' question) when the Budget is handed down six weeks from now.
The RBA's index of commodity prices is up by a thumping 16 per cent in Aussie dollar terms over the past year, and it's not all been driven by iron ore.
In fact in SDR terms LNG has been the main driver of the year-on-year gains, followed by iron ore, and then alumina.
Ore producer Fortescue (ASX: FMG) is boisterously powering towards fresh highs, closing out today's trade all the way up at $6.37.
Analysts are busily upgrading profit forecasts for BHP Billiton, Fortescue Metals Group, Rio Tinto, and the rest, with Rio trading at a post-crisis high of $92.60 today, and the newly-structured BHP (with South 32 demerged) flying high at $37.
While iron ore prices shouldn't be expected to stay at these levels over the medium term - a supply disruption due to Vale's tailings dam disaster has been a factor - the overall strength in commodity prices could drive a boost to resources investment, following on from some years of under-investment.
Exploration spend has already surged, especially in Western Australia, while further drilling will be required as existing bulk commodity projects see their reserves run down.
Financial markets are now fully pricing in a rate cut over the coming 18 months, but a surge in national income and nominal GDP - which normally results in stronger wages growth - is a factor that stands against this outcome.
Which way things go will likely depend to some extent on the housing market, with the volume of new lending in 2018 falling by a crunching 20 per cent thanks to layer upon layer of mortgage regulation.
