Commodity rally might help bank stocks as well today

Weak commodity prices and the growing potential for resource company bad debt were key drivers of the stock market sell- off in January. Two months later, commodities are confounding expectations by building on an already substantial rally. Last night saw significant gains in commodities ranging from oil to copper, iron ore and silver. These broad gains are likely to support sentiment for resource stocks today

Volatility is the one certain outcome about this weekend’s Doha meeting on oil production freezes  Since it was first mooted, the potential for a production freeze and the constant trickle of statements about its potential appear to have influenced short term oil market fluctuations.

The devil will be in the detail in terms of the Doha agreement in terms of its potential impact on the oil market. If there is a production agreement at Doha, market reaction will depend on which producers are involved, what levels production is frozen at; how long it will last and assessments of whether producers will actually adhere to it. At best a “freeze” of production would place some limits on the risk of supply increases offsetting likely cuts in US oil production this year.  The further the oil price rallies in advance of the Doha meeting, the greater the risk of a buy the rumour; sell the fact outcome.

There were signs of bargain hunting in Australian bank stocks yesterday. The current commodity rally might flow through into further support for bank stocks today, reducing short term concerns about resource sector debt problems and promoting a “buy Australia” sentiment from off shore investors. If the banks do join resource stocks in rallying, today might see solid gains for the ASX 200 which has underperformed in recent weeks.