Credit Markets Signal Support for Miners

A broader set of macro influences have been supporting mining equities during 2016 than improved commodity prices which remain cyclically weak by historical standards and still prone to downside risk. The global appetite for risk has moved in favour of the mining sector. The chart shows Australia’s small resources share price index (the blue line) and the Bloomberg global high yield corporate bond index (the red line) over the past two and a half years. The bond index is a proxy for risk appetite as well as an indicator of capital accessibility. While funding remains historically tight, the path of the bond price index suggests marginal improvements in funding conditions have occurred which will have given equity prices some additional momentum. Credit markets often set the tone for equity prices, particularly among industrial stocks where bond yields are important valuation guideposts. The high yield indicator is a more relevant gauge for the direction of mining equity prices particularly in the near term despite commodity prices being the source, eventually, for any meaningful cyclical uplift.