Commodities the key theme for stock markets this week

Despite the possibility of a soft opening this morning, the stock market starts a new week looking to consolidate last week’s gains.

The commodity rally is likely to be a key theme for Australian markets this week. Is this a rally to be sold or the beginning of a major reversal in commodities? The answer to this question will have an important bearing, not only on valuations on mining stocks but for sentiment towards growth prospects for the wider Australian economy.

There was significant support for materials stocks last week as investors who were expecting commodities to keep falling have been caught underweight. The recent price rises in key commodities have created doubts about the outlook for an ongoing commodity bear market.

This week’s data on China’s trade balance will be a key for ongoing sentiment towards commodities.  It will be important for mining stocks that the contraction in China’s trade during September was not materially worse than currently anticipated.

While the recent rally in commodity markets is encouraging, it is by no means clear that this is any more than a corrective rally at this stage. For example, the oil market remains in surplus and West Texas oil price is sitting at a key technical level. It has returned to sit just below its 200-day moving average but has not been unable to break above this average since July last year.