Investors rotate out of commodities and into bonds
International markets on Friday bore the hallmarks of a low growth, low inflation world economic environment. Traders bought bonds and sold commodities in response to a weaker than expected read in the US employment cost index for the 2nd quarter. The employment cost index failed to reveal any promise of much awaited wages growth as high underemployment rates provide little incentive for employers to pay more.
The fact that the US Dollar rallied after initially selling off on this news reflects a view that both the economy and labour market are doing well enough for the Fed to make a start on lifting rates this year. However, while wage rates remain low, the pace of interest rate increases will be very slow and unlikely to pose a significant threat to stock valuations. The fact that investors are pushing bond yields lower again reflects and outlook for very gradual increases in the Fed rate against a backdrop of ongoing low to moderate inflation levels.
The Australia 200 index has arrived at a zone of potential chart resistance around 5700-5720 consisting of the June and July peaks. This together with Friday’s decline in key commodity markets like iron ore and oil could see a subdued day’s trading with some softness in the materials and energy sectors. Investors and traders in mining stocks will now be waiting on the first of the major profit reports due from Rio Tinto on Thursday.
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Frequently Asked Questions about this Article…
Investors are moving out of commodities and into bonds due to a low growth, low inflation economic environment. The weaker than expected US employment cost index suggests limited wage growth, prompting traders to seek the relative safety of bonds.
The US employment cost index influences investment decisions by providing insights into wage growth and inflation. A weaker index suggests low wage growth, leading investors to favor bonds over commodities due to expectations of a slow pace in interest rate increases.
The US Dollar's rally, despite initial sell-offs, indicates confidence in the economy and labor market. This performance suggests that the Federal Reserve might start lifting rates, affecting investor strategies and market dynamics.
Bond yields are being pushed lower as investors anticipate very gradual increases in the Federal Reserve's interest rates amidst ongoing low to moderate inflation levels. This reflects a cautious outlook on economic growth.
The Australia 200 index's resistance zone around 5700-5720 is significant as it represents potential barriers to upward movement. This, combined with declines in key commodity markets, could lead to subdued trading and softness in the materials and energy sectors.
The decline in commodity markets, such as iron ore and oil, could lead to a subdued trading day for Australian stocks, particularly impacting the materials and energy sectors due to their reliance on these commodities.
Investors in mining stocks should be aware of the upcoming major profit reports, starting with Rio Tinto on Thursday. These reports could provide insights into the sector's performance and influence investment decisions.
For further commentary from CMC Markets, you can contact them directly at 02 8221 2137 for more insights and analysis on current market trends.
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