Why outperforming ASX resources shares will be in the hotseat on Monday

Negative leads from Wall Street are likely to pressure our market on Monday and outperforming ASX resource shares could take the brunt of the sell-off.

The S&P 500 Index closed the week with a 0.5% loss while the Dow Jones Industrials Index fell 1.5%. The  S&P/ASX 200 Index (Index:^AXJO) will probably kick off the trading week on a negative footing but it’s commodities-linked shares that will be in the hotseat.

This is because metals and oil took a big hit on Friday as the US dollar jumped, reported Bloomberg.

US dollar jump to knock ASX resource shares

The impact of the strengthening greenback can be seen against the Australian dollar, which tumbled from over US79 cents on Thursday to around US77 cents.

The Bloomberg Commodity Index that holds a basket of 23 commodities dropped the most since April.

A stronger US dollar is typically bad news for commodity prices, which as set in the US currency.

Another headwind hitting ASX shares

But the exchange rate isn’t the only headwind buffeting commodities. The rise in government bond yields due to inflation worry is also being blamed.

If inflation does become a problem as credit markets are anticipating, then central banks may be forced to restrict the flow of cheap capital into the financial system.

It’s the flood of near-free cash that has sent risk assets skyrocketing through 2020. This doesn’t only include shares but commodities like copper.

Early signs of panic-selling

In fact, the copper price is trading at a more than eight year high and some experts believe it could hit a new price record.

While there’s more than a tinge of panic-selling across the board, these latest developments spell trouble for ASX mining and energy shares.

This spells trouble for the BHP Group Ltd (ASX: BHP) share price, Fortescue Metals Group Limited (ASX: FMG) share price, Woodside Petroleum Limited (ASX: WPL) and OZ Minerals Limited (ASX: OZL) share price – just to name a few.

Many of these stocks have been outperforming of late on the belief that high commodity prices will leave them flushed with cash. Some of this enthusiasm is likely to unwind on Monday.

3 reasons to buy ASX resource shares during the sell-off

However, the bigger question is whether ASX resource shares have hit a peak and its time for investors to cut and run.

I believe any sell-off represents another opportunity to top us, as it has been for a while now. My optimism is premised on a few factors.

Firstly, the rise in inflation expectations is due to economic growth. Growth is never a bad thing for equities.

Secondly, if inflation does become a problem, hard assets like commodities tend to be a good hedge against rising prices. After all, the costs of goods can’t rise sustainably if raw material prices are falling.

Finally, ASX resource shares are not generally overvalued. I am not saying they are cheap as several are trading at one-year highs of more, but they are certainly not in bubble territory.

As long as the volatility doesn’t scare you, the next few weeks could be a good buying opportunity.

More reading

• These were the best performing ASX 200 shares last week
• These were the worst performing ASX 200 shares last week
• Forget the ASX 200! Another market crashed this week
• ASX 200 sinks 2.4%, Afterpay plunges, AMP jumps
• Here are 3 ASX 200 diamonds in the spotlight while the market sank today

Motley Fool contributor Brendon Lau owns shares of BHP Billiton Limited and OZ Minerals Limited. Connect with me on Twitter @brenlau.

The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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