The S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index isn’t far off its record high despite this week’s market meltdown but there are two key sectors that are staring down a bear market retreat!
This is because two key commodities – oil and iron ore – have crashed into bear market territory this week, and experts warn of more near-term price weakness as the escalating trade war between the US and China takes its toll.
A bear market is defined as a peak-to-trough fall of 20% or more and the Brent crude benchmark price officially entered one on Tuesday as oil investors took to the exits on worries of waning demand and oversupply of the commodity, according to the Wall Street Journal.
Oil slips into bear market
Crude was already on the nose but US President Donald Trump provided the proverbial nail to the coffin for oil bulls when he announced a 10% tariff on Chinese imports that weren’t affected in earlier sanctions.
Our leading energy stocks like the Woodside Petroleum Limited (ASX: WPL) share price, Oil Search Limited (ASX: OSH) share price and Santos Ltd (ASX: STO) share price have already been underperforming the ASX 200 over the past year, and there’s no near-term turnaround in sight.
Investors should be particularly worried that the seizure of another oil tanker by Iran this week failed to give the oil price a boost as it normally would.
Iron ore bends to the bears
Meanwhile, the iron ore price has also succumbed to a bear attack as futures in Singapore tumbled back to the US$80 plus a tonne mark, according to Bloomberg.
The price of the steel making ingredient was fetching over US$100 a tonne and experts warn that the commodity has yet to find a floor after the sell-off.
The trade war is hurting sentiment towards Australia’s largest export, but iron ore is also under pressure as supply of the mineral is expected to increase in the current half of 2019 with Vale SA poised to restart its shuttered mines in Brazil.
Chinese steel mills in China are reluctant to increase iron ore stockpiles in the face of the weak demand backdrop, said Commonwealth Bank of Australia (ASX: CBA) in a note.
The souring trade relations between the US and China was blamed for this, although Trump’s branding of China as a “currency manipulator” added an extra drag to the market.
The iron ore tumble is reversing yesterday’s gain in the Fortescue Metals Group Limited (ASX: FMG) share price, while the BHP Group Ltd (ASX: BHP) share price and Rio Tinto Limited (ASX: RIO) share price also took a spill today.
Things don’t look so good for our energy stocks and it’s a sector I have largely avoided for a while, although I think it’s worth keeping an eye out for our iron ore producers.
This is because I have more confidence in the iron ore market holding up given the pipeline of infrastructure construction projects and the cash-flushed balance sheets of our largest miners.
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The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.