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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Frequently Asked Questions about this Article…
Weak commodity prices can weigh on market sentiment, particularly impacting sectors like resources. When prices for commodities such as iron ore and oil fall, it can lead to concerns about the profitability of companies in these sectors, affecting their stock prices.
China's economic stimulus can have a positive impact on global markets by calming market nerves and potentially boosting economic activity. However, if China's economic growth continues to soften, the long-term benefits of such stimulus may be limited.
Iron ore prices are crucial for investors because they directly affect the profitability of mining companies. A sharp fall in iron ore prices, like the recent drop to $53 in China's spot price, can be concerning for investors hoping for price stability.
Oil prices influence market sentiment by affecting the resource sector's outlook. Weaker oil prices can lead to market nerves, especially when traders are uncertain about supply consequences due to geopolitical issues, such as turmoil in Yemen or negotiations with Iran.
The US Federal Reserve influences stock market movements through its rate increase program. Janet Yellen's recent speech indicated that without significant improvements in US inflation and economic growth, rate hikes will be gradual, limiting their immediate impact on stock market valuations.
The ASX 200 index's recent movements, such as the mid-March low of 5748 and last week's high of 5978, are significant for technical analysis. These levels set up the potential for a double top formation, which could indicate a deeper market correction if the index breaks below the 5748 low.
Geopolitical events, like turmoil in Yemen or negotiations with Iran, can affect commodity prices by creating uncertainty about supply. This can lead to fluctuations in prices, impacting market sentiment and the valuation of companies in the resource sector.
Investors should consider that while markets are forward-looking, it is premature to anticipate significant increases in US bond yields. The Fed's gradual rate increase program suggests that any valuation impact on the stock market from rising bond yields will be limited for now.
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