Iron ore sell-down

The first full trading week of 2014 was a disappointing for investors. The ASX 200 has recorded only two winning sessions so far this year, and is down approximately 0.7% since the end of 2013.

Whilst this is not ideal, we need to bear in mind trading volumes are normally very light during this time of year as investors continue to bask in the holiday sunshine. Light trading volumes tend to exaggerate price movements.

The Aussie market's indifferent start to the year has been driven by some hefty losses in the materials sector, and in particular, iron ore miners.

In today's editorial we will look at some of the factors behind the weakness in iron ore miners and whether this is a sign of things to come.

The sell-off

Below we chart last week's move in two of the big iron plays – Rio Tinto and Fortescue - as well as junior miner, Mount Gibson Iron.

The three charts displayed a similar pattern over the week. There was a sharp price drop, accompanied by a noticeable pickup in trading volume.

Rio Tinto slumped 6.8% over the week, with Fortescue (-10.7%) and Mount Gibson Iron (-11.7%) faring much worse.

These are not insignificant losses, and the spike in volume could be an indication of domestic and offshore funds liquidating their positions after the holiday break.

China data disappoints

The iron ore sell-down likely came in response to recent data out of China painting a worrying picture of its economy.

On New Year's Data, data revealed China's manufacturing sector growth slowed in December – the second month in a row where manufacturing growth has slowed in the world's second largest economy.

That was followed by CPI data last Thursday, which revealed inflation slowed from 3% in November to a smaller-than-expected 2.5% annual pace in December.

The news wasn't much better on Friday, which saw the release of the latest Chinese trade numbers. China's trade surplus shrank more-than-expected in December, with the nation's exports trailing estimates.

All-in-all the latest data points appear to be signalling a manufacturing-led slowdown in China's economy. Beijing's clampdown on speculative activities is contributing to the weakness, as reflected by the significant drop in inflation last month.

Heading for further weakness?

Should we be concerned about last week's rout in the iron ore space? At this stage, no. Iron ore prices have been relatively stable in recent months and remain above US$130 a tonne, as illustrated below.

Source: Bloomberg

Although the sell-off in iron ore miners was accompanied by an uptick in volume, trading activity was nowhere near levels that would suggest significant selling pressure.

Again, we reiterate that price movements tend to be exaggerated in either direction during the end-of-year holiday period.

Whilst recent data out of China has underwhelmed expectations, the nation's manufacturing and trade sectors are still showing signs of growth.

Moreover, the Port Hedland Port Authority revealed last week that total exports at Port Hedland reached a record 29.9 million tonnes in December, 12% higher than December 2012's figures.

These are strong numbers and indicate iron ore producers are tracking for solid earnings growth in the December half.

So whilst iron ore miners suffered the wrath of investors last week, the sell-down occurred amid light trading volumes and appeared to be an overreaction to some weak Chinese economic numbers.

Weekly Market Wrap: Iron Ore Sell- Down is a post from: Australian Stock Report Market Pulse Blog