Commodity momentum slows but market remains on edge

The strong downward momentum in oil markets stalled on overnight markets. However, there was no news to support optimism and with spot iron ore continuing to drift lower, investors are likely to remain nervous about mining and energy stocks today.

The 5% rally in Qantas’s share price yesterday is a totemic reminder that weaker energy prices do have benefits. It’s true that a weaker for longer scenario in oil would put more pressure on Australia’s income via lower LNG prices and declining terms of trade. However, it may also hasten the rebalancing of the economy via downward pressure on the Aussie dollar and lower costs for many businesses and consumers. This thinking may play out in the stock market with investors looking for value in stocks and industry sectors that will benefit from low oil prices.

The impact of lower oil prices on inflation will also be a key consideration for investors. While central banks try to look through the direct impacts of lower prices on the CPI, it does have secondary impacts reducing the cost of other inputs and influencing inflation expectations. Lower commodity prices may slow the pace of Fed tightening next year and keep other central banks in easing mode. Today’s release of China’s inflation data will be seen in this context. Weaker than expected inflation data would raise concerns about the negative impacts of excess capacity in China’s economy and the strength of its currency. However, it would also pave the way for additional stimulus.