Australian wool auction sales this week saw price reductions across the board, seemingly making a lie of the positive sentiments that emerged at last weeks sale series. The buyer apprehension that was seen prior to last week returned to trend, with many influential buyers reverting to their month long cautious approach to buying, reflecting the sporadicity of current overseas demand. All wools were impacted to varying degrees, but the carding types and lower quality super fine Merino sectors were hardest hit. The Australian Wool Exchange (AWEX) Eastern Market Indicator (EMI) tracked 2.6% or 53ac lower to 1970ac clean/kg. In US Dollar (USD) terms the indicator was less affected as the stronger AUD v USD forex lessened the effect but still slipped 1.8% or 26usc to close the week at 1405 usc clean/kg.

The direct reversal and swiftness of change in market sentiment and pricing at first seemed surprising, but given the selection that greeted buyers, in hindsight it was somewhat inevitable that we would see a rather lacklustre tone enveloping the sale rooms. Much of the offerings’ quality was drought influenced. The significant fining up of the average national micron (fibre diameter) is playing havoc on Asian manufacturers expectations. Many Chinese users are saying our current supply is “too fine”, citing that demand remains strongest and prices influenced predominantly around the 19.5 and 21 micron type segments.

To highlight what a difference the supply chain, from grower to end user, is seeing from season to season, this week the Sydney market in the Merino fleece room offered an average of 17.6 micron compared to 18.5 micron offered at the same sale last year, whilst Melbourne offered 19.2 micron compared to 20.1 micron last season and Fremantle 19.2 micron this year as opposed to the 19.5 micron of last season. In addition, the AWTA key test data revealed that for the first quarter of the season, that despite the 11.4% overall fall in total volume of Australian wool tested, there was 70.6% more wool tested that is finer than 16.5 micron, 18.6% more wool tested between 16.6 and 17.5 micron and 9.1% more wool tested in the 17.6 to 18.5 micron range.

That’s not to say that demand is not strong in the super fine Merino (less than 18.5 micron) area. European interest remains as strong as ever and even in the general declining market, premium pricing by the Italians in particular, is clearly evidenced. Small pockets of Indian buying for better specified batches is also apparent, but when sale lots fall outside the required standards of Europe and India, the price falls “off the cliff”, making up a significant percentage of the lower micron price guides. In some of the 15 to 17 micron range for example there is up to 800ac difference between sale lots in the top and bottom of the quality range.

Competition in the sale rooms was described last week as some of the fiercest seen for quite some time, but the complete opposite was on display this week. The prompt demand from China was almost exclusively placed in the hands of the indent buying companies, so trader exporters were left largely with just the scraps to compete for. With nearly all orders needing completion in the domain of just two or three companies, it debilitated the capacity of other sale room operators to compete. The largest top maker from China continues to be very active and could be seen as perhaps a positive indicator to better market conditions reappearing.

The biggest falls were seen on the carding markets of up to 7.5%. This readjustment in levels was expected as prices have been considered far too close to other higher value wool types for months. The lowering levels should help attract fresh business opportunities.

Next week has just under 39,000 bales being offered.

Wool forwards report - SA (Southern Aurora) Markets

A complete turnaround in sentiment in both the auction and forwards this week. The grower interest in the post Christmas period, that SA Markets saw last week, evaporated early in the week following the positive spot auction close last Thursday. Trading was restricted to the nearby months of November and December with exporters and processors dominating the selling. November opened the week trading at 2240 but was sold down to 2180 on the close.

SA Markets expect bidding to be cautionary as traders weigh up the extent of the demand reduction bought on by the sustained high prices of the first two months of the new season, the ongoing trade war tension and stubbornly firm Australian Dollar. Volatility will remain as the only constant. Opportunities should arise for both buyers and sellers as the balance of supply and demand fluctuates.

The lack of consistency in the volume of both bids and offers on the forward market reflects the under valuing of price certainty right along the wool pipeline. This is at odds with most agricultural commodity forward markets showing higher volumes in current high risk landscape.

AUD Commentary - SA (Southern Aurora) Markets

The Australian Dollar surprised many by falling late this week from the midweek high of .7160, despite the very strong Australian Employment report, and today (Friday) the AUD has fallen to the week's low of .7092.

ABS Data this week showed the unemployment rate falling to 5.0% against a 5.3% expectation, and was the lowest since April 2012. However the economy added only 5,600 jobs last month against economists predictions of 15,000. Interestingly full-time employment rose by 20,300 over the month, partially offset by a fall in part-time employment of 14,700. Over the year full-time employment surged by 217,500, nearly four times higher than the 63,400 increase in part-time employment.

Comments from the RBA suggest that wages growth may now lift with stronger employment, however a number of economists say that given the continuing sell-off in house prices, the gyrations in global Equity and Bond markets and the RBA’s recent comments about “weak household income growth and high private debt levels” then it’s unlikely any change in Australian interest rates is likely within the next 12 months.

In other news US Stocks were under pressure amid concerns the US Fed will tighten monetary policy faster rate than expected, the Dow reacted by Dow falling 327 points. Chinese Equities fell heavily this week with the Shanghai Composite finished falling to its lowest level since 2014, and now down 30% for 2018.

Technically the underlying trend for the AUD is bearish, with a break of short term support, and appears headed for the 2018-low of .7041. A break of that support would target .6954. Given the market is oversold, it may actually trade higher, before another attempted sell-off.