Mining shares are extending their poor performance since the start of the reporting season and there's probably more near-term pain for the once-mighty sector.
The mining sector is the worst performer on the market today and is leading the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index lower. This group also recorded the biggest losses during the August reporting season although it isn't their earnings that are worrying investors.
Our mineral producers have instead come to represent the whipping boy of the Trump trade war and global tensions are escalating with the US President about to take the "nuclear option" by slapping additional tariffs on nearly everything China exports to the US.
The drastic move by Trump that covers US$200 billion of Chinese goods could be made in the coming days and that would represent a huge escalation in the global trade war.
It isn't only China that Trump is picking a fight with. He is also aiming his trade bazooka at Canada and the European Union as he tries to extort a better deal for the US.
The simmering trade dispute has hammered commodity prices with the LME Metals Index falling 3.8% in August, the third consecutive monthly loss. Tariffs will curtail global trade and that means a drop in demand for minerals.
Only aluminium managed to eke out a gain last month but that didn't help the share price of Alumina Limited (ASX: AWC) although its underperformance isn't as bad as the mining majors like BHP Billiton Limited (ASX: BHP), Rio Tinto Limited (ASX: RIO) and South32 Ltd (ASX: S32).
What's more, commodity prices and mining stocks are facing a second headwind – the rising US dollar. Trump's trade tantrum is forcing investors into the safety of the greenback and a higher US currency is a negative for commodities as the two tend to move in opposite directions.
It's easy to see why investors are nervous as we are unlikely to see trade tensions ease in the short-term given the macro environment, and that means it's probably too early to buy the dip in mining shares.
What's also weighing on the sector is the belief that FY18 profit growth is as good as it gets for our miners even though our miners are the best placed to return excess capital to shareholders.
But if there is a silver lining, it's that production data around the world (except perhaps the EU and we don't need to talk about Turkey) is still holding reasonably firm even as Trump wages his war on global trade.
"A raft of manufacturing PMIs [Purchasing Manager's Indices] for August suggest the sector, crucial for metals demand, continues to expand though at a slower pace than earlier in the year," said Macquarie Group Ltd (ASX: MQG).
"Yet there were also many signs of improving manufacturing sectors. Japan's PMI accelerated to 52.5, from 52.3, and Brazil, Russia and Korea's PMIs all posted decent gains (the latter two still signify a contraction, however, though in Korea's case only just)."
There are contradictory signs from China but most experts would accept that its PMI is holding steady as the Chinese government tries to off-set a slowdown in exports by stimulating the domestic economy.
Investors should sit on the sidelines for a bit as there is likely to be further downside risk to mining shares, although I suspect a buying opportunity will emerge in the coming months – assuming Trump doesn't push world trade over the cliff.
