Positive start ahead of employment data

This morning’s market is off to a solid start, led higher by the energy and materials sectors. However, at this stage, trading on the ASX 200 index remains inside yesterday’s range, reflecting overall caution ahead of this morning’s employment data.

The 5% jump in the US oil price last night was a significant move given that average daily production was down only a fractional 20,000 barrels to 9.38m. The size of the move in oil is likely to reflect short covering now that production is finally starting to turn the corner and chart resistance has been broken. Even if this move only signals the beginning of a limited rally in the oil price, the fact that an ongoing decline now looks less likely is a big relief to highly leveraged oil stocks like Santos, which has now rallied more than 15% this month.

However, another factor behind the rally in oil is the possibility that the decline in US production over coming months could be larger than forecast. The oil rig count now stands at 760 compared to the October peak at 1609 and is well below the number considered necessary to maintain current production levels over coming months, even allowing for improvements in rig productivity.

Today’s employment data could have a significant influence on market thinking. Good growth, especially in full time jobs will create doubts about another rate cut. A really weak jobs number at this stage will firm up expectations for a cash rate below 2%. This would support yield stocks like the big banks but potentially place pressure on cyclical stocks like the discretionary retailers.