Commodity prices weigh on the stock market nerves

Weak commodity prices at the end of last week will weigh on market sentiment this morning. However, investors may take some heart from the statement by the Governor of China’s central bank indicating that further stimulus initiatives are likely.

The fact that iron ore prices have resumed their descent with Friday’s sharp fall in China’s spot price to $53 will be a concern of investors who may have been hoping that the spot price was forming a base in the high $50’s. Weaker oil prices will also add to market nerves in the resource sector as traders discount the near term supply consequences of turmoil in Yemen and await the next step in negotiations with Iran on its nuclear program that could ultimately see more than a million barrels a day back on the market.

Confirmation that further stimulus in China is likely might have some positive announcement impact and help calm market nerves but in the long run is likely to be outweighed by concerns that growth in China’s economy continues to soften.

Market thinking will also be influenced by Janet Yellen’s speech on Friday. This makes it clear that unless there is a significant improvement in US inflation and economic growth, the Fed’s rate increase program will be very gradual. While markets are forward looking, it is still premature for world stock markets to be anticipating anything more than a relatively small increase in US bond yields for some time yet. The valuation impact of Fed rate hikes on the stock market may therefore fairly limited for the time being.

From a technical point of view, the mid-March low of 5748, in the ASX 200 index now looks significant. Last week’s high at 5978 sets the index chart up for a potential double top formation. This would be completed by a break below the 5748 low, indicating potential for a deeper correction.

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