Commodities and Google put market on the defensive

The size of the commodity rally itself has got to the stage where it is beginning to weigh on investor sentiment. In these volatile times the recent rally is beginning to create downside risk.

Traders are likely to look through yesterday’s spike in spot iron ore prices, pushing the major resource stocks lower at the open this morning. Markets will pay more attention to yesterdays’ drop in steel futures than to the spike in iron ore. While there are signs that underlying demand in China may improve this year, it’s not likely to be enough to explain the 13% increase in China’s steel production last month. Markets are concerned that this has been driven at least partly by opportunistic response to margin improvements that will not be sustainable.

The fact that Alphabet, the owner of Google missed profit expectations and was sold in afterhours trading will weigh on market sentiment today. This sets US market up for a nervous start tonight as investors contemplate disappointing advertising revenue growth and its implications for wider business confidence. This comes against the background of an earnings season that has overall surprised to the upside so far.

Another set of low weekly jobless claims is encouraging for the US economy. Claims have been consistently low in recent weeks, indicating that despite some recent misses in other economic data, the US job market remains in good shape. This may give US Dollar bears reason to pause.

Woolworth’s shareholders will be nervous about another strong set of sales numbers from Wesfarmers yesterday. Coles Food and Kmart’s sales growth in particular suggest Woolworths may still be struggling to consolidate market share at this stage.