Australian wool auctions finally succumbed this week to the slump in the global economy caused by the covid-19 viral outbreak and the enormous flow-on effects. The series of unfortunate events over the past month or so had seen the wool price bravely stand against the obvious thoughts of price degradation. Massive losses inflicted on influential monetary markets this week though saw our product yield to the negative macroeconomics in play that are way beyond the normal price realization basics that the wool price will normally adhere to.

The Australian Wool Exchange (AWEX) Eastern Market Indicator (EMI) dropped 41ac or 2.6% to 1521ac clean/kg. In USD terms the indicator more succinctly represented the damage done to the wool price. The USD EMI  fell significantly by 5% or 52usc to 982usc clean/kg.  Half (2.5%) of that fall was made up by the greatly reduced value of the Australian dollar against the US dollar. Even more crushing was the Euro value of wool as it fell 6.3% over the week.

The largest influencer at present is that all stock and share markets have officially hit bear market status. This affects businesses access to finance, lost true value of the enterprise and their ability to service debt and liquidate inventory or capital assets without damage. A bear market occurs when the index or stock falls 20% or more from the peak for a sustained period of time. 

The major global stock indexes initially entered a correction this month amid mounting fears about the impact that the coronavirus outbreak could have on the global economy and company earnings growth. Adding to this was a largely Saudi versus Russian oil market price war that had forecasts of much lower profits for globally influential energy companies, thus the bear market has ensued.

Wool has not gone anywhere near bear market status. In fact, the fall of 2.5% this week could be read as a positive given the severity of falls on the financial markets. More accurately the wool price fall is categorised as a market correction. In normal trading and economic times, corrections are considered healthy as it gives manufacturers a chance to restock the pipeline at more attractive prices and encourages speculation which can add stimulus to the market. Little solace though to grower sellers coping with a reduction in income.

By the close of selling this week, Merino fleece and skirtings finer than 18.5 micron had fallen by 50 to 65ac whilst broader than 18.5 micron was less affected but still reduced by 30ac. Mixed signals were evident between selling centres on the final day. A large offering in Melbourne saw prices actually recover slightly but Fremantle and Sydney still had prices tracking lower. Cardings were generally 30ac cheaper but Crossbred wools again managed to hold value.

In addition to the problems above, the quality of wool on offer continues to present difficulties for exporters. In fact, more than one auction operator commented on the Sydney offering being the lowest yielding selection they had ever experienced. Many clips failed to average 50% dry yield. Minimal volume of the “normal” China types were available, particularly for the commodity wools of 19 to 22 micron hitting the correct specifications..  

Chinese top-makers and Chinese indent buyers competed strongly with the local traders again. Demand from China appears to be holding. Most operators to that nation constantly adjusted downward their price limits as they accumulated a quantity considered risk worthy to take into inventory. Also the comparatively big spend by some sale room buyers last week had cash resources stretched this week. Passed in rates hit 25.5%.

Next week has over 50,000 bales scheduled. Melbourne has almost 30,000 bales to try and clear and will sell over three days. 

Forwards Commentary - SA Markets
By: Mike Avery

“Nothing in life is to be feared; it is only to be understood. Now is the time to understand more so we can fear less” – Marie Curie

The uncertainty around the impact of the covid-19 on supply chains and global economies has seen stock and commodity markets fall sharply. Up until last week the wool market had held well against the tide but disruption to the flows caused by a ransomware attack on the major IT system provider combined with the general malaise will see price fall again this week. The key 21.0 Index fell 35 cents on Wednesday. This was the 7th time in the last 2 months that a daily movement was in excess of 30 cents. We are on track to outstrip 2019 as the most volatile year in the market’s history. 

The forward markets traded sporadically early in the week as buyers and sellers tried to find fair value. 19.0 traded 50 under last weeks close and 28.0 20 cents under pre-empting the falls in the spot auction. Sellers continued to try and de-risk by offering discounts from 50 to 80 cents out to one year forward. 19.0 traded to 1680 from December through to April 2021.

Bidding in the forwards remained muted while the physical tried to find a level in the spot market. We anticipate forward levels in the April to June quarter around 1710 to 1740 for 19.0 microns and 1680 to 1710 for 21.0 microns. Spring and New Year levels reflect the volatility and risk that strangle commodity markets at present. Interest on 19.0 will likely range from 1660 to 1700 and 21.0 1630 to 1660.

AUD Commentary - SA Markets
By: Garry Booth

The Australian Dollar was smashed late this week, falling from Mondays high of .6683 to a low Thursday night of .6211 before bounce into friday (today) at .6285. This against the backdrop of World Markets in a Coronavirus panic as overnight (Thursday) the Dow Jones Index slumped 2,356.6 Points or 9.99% to 21,200.62 in its worst day since the 1987 “Black Monday” crash.

The U.S. Dollar responded rising sharply against most global currencies, while Crude Oil Prices took another hammering with Brent Crude falling to $32.84, down 8.24% on the day as the oil war between Saudi Arabia and Russia intensified.The MSCI’s gauge of Global Stock Markets shed 9.51% overnight and is now down more than 26% over the last 20 trade sessions. Overnight the U.S Federal Reserve swung into action announcing $1.5 trillion cash injection through short-term loans. Analysts are now suggesting the Fed is likely to also move cut the official rates by a remarkable 1.0% in order to try calm markets. Overnight also European Central Bank (ECB) President Christine Lagarde announcing the Bank would purchase EUR 120 Billion in Bonds in first quantitative easing since she became President last October. Yesterday the Australian Prime Minister Scott Morrison said.announced A$17.6 Billion Economic Plan saying “Our stimulus package will focus on keeping Australians in jobs and keeping businesses in business so we can bounce back strongly,” Meanwhile data released by the Westpac-Melbourne Institute showed Consumer Sentiment in Australia fell to a 5 year low 91.9 in March from 95.5 in February, the second lowest since the global financial crisis, however the survey also showed most Australians thought this was mostly temporary and were quite upbeat for longer term prospects. Westpac Chief Economist Bill Evans said the RBA is very likely to cut rates again by 0.25% at its April meeting.

Technically the re-test and break below the .6430 support triggered a sharp sell down with Thursday’s trading range more than 280 points. The Aussie will try to claw back part of that fall, as it is over-sold, however technically it has broken support and is in a downtrend. We expect large daily trading ranges during this volatility period. Support is found at last nights low of .6211 while overhead resistance is at .6430. We expect the Aussie to trade lower over the coming weeks.