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• Brent Crude at depressed levels

• Iron Ore outlook with China slowdown

• AUDUSD outlook with falling commodities

This week…

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General Advice & Risk WarningPlease note that any advice given by Invast staff is deemed to be GENERAL advice, as the information or advice given does not take into account your particular objectives, financial situation or needs.

Therefore at all times you should consider the appropriateness of the advice before you act further.

CFDs and Forex are leveraged products and carry a high level of risk and are not suitable for everyone. You can lose more than your initial deposit so you should ensure CFD and Forex trading meets your investment objectives. We recommend you seek independent advice. Strategies and charts used in this presentation are for example only. You are reminded that past performance is not indicative of future performance.

Invast Financial Services is regulated by ASIC. It's important for you to read and consider the relevant Product Disclosure Statement and Financial Services Guide which contains details of our fees and charges before you decide whether or not to acquire any financial products. These documents are available at www.invast.com.au

Invast Financial Services Pty Ltd ABN: 48 162 400 035. Australian Financial Services Licence No.438 283

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This week we look at the following topics:• Brent Crude at depressed levels• Iron Ore outlook with China slowdown• AUDUSD outlook with falling commodities

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Dear Readers,

Throughout the monthly of October we will be publishing our views and insights on commodity prices after they have been absolutely savaged during the month of September. We thought this would be a great opportunity to run through some of the key markets that Invast quotes on its MT4 platform and compare price action against fundamental information. Invast clients will also have access to a webinar presented by Invast Insights editor Peter Esho on Tuesday 28 October at 6:30PM.

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Our focus will be on base metals and bulk commodities this month, all under savage price action as of the time of writing as global investors anticipate higher interest rates in the United States and drive up bond yields, in turn adding upward pressure to the US dollar. As a general summary, we think of commodities in the following two ways:

1. Industrial commodities – These are commodities like oil, copper, iron ore, nickel, zinc, tin and natural gas which are used in the production of goods and services (industry); and2. Currency commodities – These are commodities like gold, silver and platinum which have little industrial use and more currency elements.

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Our weekly summary will be as follows:

• Week commencing 6 October 2014 – a quick look over the price performance of key commodities• Week commencing 13 October 2014 – fundamental drivers behind the industrial commodities• Week commencing 20 October 2014 – the impact of China on the bulk commodities, namely iron ore and coal• Week commencing 27 October 2014 – medium to long term trading ranges for the key commodities and also a look at cross pairs like the gold to silver or gold to oil ratio.

• Week commencing 20 October 2014 – the impact of China on the bulk commodities, namely iron ore and coal

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We spoke last week about the supply challenges around industrial commodities, namely base metals like copper. The copper price has since fallen below US$3/lb – a key technical support level which we commonly talk about. We still hold the view that copper should hold this support level because the supply side will find it difficult to mine at current prices. Stock piles for copper are not as high as those for nickel at the London Metals Exchange.

This week we plan to touch on iron ore and in particular the impact of the slowdown in China. Our note this week will be short and brief but to the point. We get the feeling that the slowdown in China is catching many by surprise. The price of 62% iron imported into China – free on board – is still struggling to rise above US$80 per tonne. This is around half the level compared to highs hit over the past two years. The reduction in the iron ore price might be a function of higher supply out of key producers like BHP and Rio Tinto but there is no doubt that the slowdown in China’s steel manufacturing intensity is also a major factor to consider.

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Anecdotal evidence of China slowing also includes:

• The Brent crude price is trading at depressed levels, last at around US$85 per barrel where we think it will consolidate and find some major support.

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• Recent protests in Hong Kong illustrate the key short term social problem facing mainland China. While the Hong Kong protests have not yet spilled over into the mainland, there are many investors and businesses questioning just how sustainable the current system of government is as China continues to grow as the world’s second largest economy and the major trading partner of many advanced, democratic economies.

It’s difficult to call the impact of these events but we get the feeling that many in Australia have overlooked the impact of this event. Considering China's long history - and the history of student movements - the current protests in Hong Kong will not be the last time China faces social unrest. The most interesting article we have read around the Hong Kong protests has been from global intelligence company Stratfor. Geopolitical expert George Friedman spoke extensively about the topic, in the context of geopolitical significance, in his column published last week.

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“…It is difficult to gauge the ultimate effect of the protests in Hong Kong. Still, the student activism there reminds us why these subjects of society are well-suited to protest. Because of their position in the human geography, students will often be at the front of generational changes in their respective societies, even if they are not always the most decisive agents of change…” Student Movements: A Subject of Human Geography

• Pollution is a huge problem in China. Many in the markets have overlooked this. We think policymakers have been intentionally slowing the economy down in order to appease domestic concerns around air quality and pollution and the impact this will have on long term health costs. According to The Guardian newspaper, many provinces are still hitting record high levels of air pollution as of last week.

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“…Days of heavy smog shrouding swathes of northern China pushed pollution to more than 20 times safe levels on Friday, despite government promises to tackle environmental blight. Visibility dropped dramatically as measures of small pollutant particles known as PM2.5, which can embed themselves deep in the lungs, reached more than 500 micrograms per cubic metre in parts of Hebei, a province bordering Beijing…” China pollution levels hit 20 times safe limit – Friday 10 October 2014

Pedestrians covering their faces as they cross a street in Beijing amid heavy smog. Source AFP

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The three points discussed above are all on our mind when viewing the iron ore price and China’s steel manufacturing industry. We have been medium to long term bulls on China’s growth outlook but we cannot hide under a rock and ignore short term challenges which are having a direct impact on investment sentiment and bulk commodity prices. We are slightly changing our view this month to one which sees the iron ore and coking coal markets improving but probably not after some significant pain is taken through the mining companies which have grown so rapidly over the past decade on the back of the iron ore gravy train.

We have highlighted iron ore producers are potentially turning around in terms of share price performance earlier this year, our view is now one of caution. We might not see a significant change for a while, perhaps a year or two.

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Is it wise to change our view at the bottom of the market? Probably not, but we cannot hide from the changing fundamentals either. We think the following response will come from the major iron ore producers in the coming months in order to adapt to the iron ore price:

• Major producers like BHP and Rio Tinto will put a brave face on the downturn and talk up their ability to cut costs. We do think there is the prospect of cutting costs but we think some of this will be overplayed. For example, on 6 October 2014, BHP’s iron ore boss Jim Wilson told shareholders of his plans to “cut unit costs at Western Australia Iron Ore (WAIO) by at least 25% and the potential to increase capacity there by 65m tonnes per year at a very low capital cost”

• Mid-tier iron ore producers will look to diversify outside of iron ore and create other pillars, potentially picking up fragmented parts of other listed mining companies which have struggled during the down.

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• Any increase in the iron ore price in the short term will see many mid-tier producers tapping the market for capital and making sure their balance sheets are cleaned up after a difficult period of operating Cashflow leakage.

We dedicated this week to iron ore and China because this is Australia’s single largest commodity and the huge amount of production goes directly into Chinese steel mills. The fall in the iron ore price and sentiment towards iron ore directly impact the way the Australian dollar trades. Our discussion here is not just of interest to those looking at iron ore stocks but to currency traders forming medium term views on the Australian dollar given huge recent falls. The charts below shows just how large iron ore has been in terms of Australia’s total export trade.

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Chart source: Australian department of foreign affairs and trade

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Chart source: Australian department of foreign affairs and trade

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Bottom line: We have three key things in mind while viewing China – weak oil prices, issues around social order via Hong Kong protests and pollution. What happens in China is important to where the iron ore price goes from here. Many analysts and brokers focus on financial metrics but our focus here goes beyond just the ordinary published statistics.

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As iron ore is Australia’s largest export, where the price goes over the coming months and years will have a direct impact on the Australian dollar. We are generally bullish on the long term prospects. We plan to discuss the significance of the iron ore price fall and our precise outlook at this month’s webinar, details provided below.

Book your place early, the event is likely to gain significant interest.

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Commodities outlook: Join the webinar to discuss these points

Invast Insights editor and contributing author Peter Esho will summarise the October outlook guide for key commodities – copper, nickel, gold and silver - in this exclusive webinar. Esho is a regular contributor on CNBC, Bloomberg and host of ‘Your Money Your Call’. In his webinar he will outline:

Current price actions on the key commoditiesFundamental drivers behind demand and supplyThe impact of China – are things about to change?Trading key cross pairs like the gold to silver ratio and gold to oil

Peter’s webinar will cover both the fundamental and technical outlook on key commodities quoted on Invast’s MT4 platform, plus the key drivers to look out for when trading. This webinar is expected to fill fast. Q&A will be open straight after the presentation. Register now by clicking here.

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Go to www.invast.com.au/insights to get a complimentary 4 week trial and receive the latest insights as they are published to our live clients.

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DisclaimerPlease note that you are receiving this report complimentary from Invast Financial Services Pty Ltd (AFSL 438 283). Invast staff members may from time to time purchase securities which are included in this or future reports. The authors of this report may or may not be holding a position in the securities mentioned. Please note that the information contained in this report and Invast's website is of a general nature only, and does not take into account your personal circumstances, financial situation or needs. You are strongly recommended to seek professional advice before opening an account with us.

General Disclaimer: This newsletter contains confidential information and is intended only for the person who downloaded it. You should not disseminate, distribute or copy this newsletter. Invast does not accept liability for any errors or omissions in the contents of this newsletter which arise as a result of downloading this newsletter. This newsletter is provided for informational purposes and should not be construed as a solicitation or offer to buy or sell any financial product. Invast Financial Services Pty Ltd is regulated by ASIC (AFSL 438 283 | ABN 48 162 400 035).

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Risk Warning: It's important for you to read and consider the relevant Product Disclosure Statement, and any other relevant Invast Financial Services Pty Ltd documents before you decide whether or not to acquire any financial products listed in this email. Our Financial Services Guide contains details of our fees and charges. All these documents are available here on our website, or you can call us on +612 8036 7555. CFDs and Foreign Exchange are leveraged products and carry a high level of risk and you can lose more than your initial deposit so you should ensure CFD and Foreign Exchange trading meets your personal circumstances.

General Advice Warning: Being general advice, this newsletter does not take account of your objectives, financial situation or needs. Before acting on this general advice you should therefore consider the appropriateness of the advice having regard to your situation. We recommend you obtain financial, legal and taxation advice before making any financial investment decision.

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