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Commodity rally might help bank stocks as well today

Strong gains in commodity prices look like producing solid gains for the share market today.
By · 13 Apr 2016
By ·
13 Apr 2016
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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.

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Ric Spooner
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Frequently Asked Questions about this Article…

Commodity prices have been rallying, which is helping to support resource stocks. This rally is likely to improve investor sentiment and could lead to gains in the stock market, particularly for resource companies.

The Doha meeting on oil production freezes could lead to volatility in oil prices. If an agreement is reached, the market reaction will depend on which producers are involved and the details of the production freeze. A successful agreement might limit supply increases, potentially supporting oil prices.

Volatility is expected because the outcome of the Doha meeting is uncertain. The potential for a production freeze has already influenced short-term oil market fluctuations, and the details of any agreement will significantly impact market reactions.

The current commodity rally could provide support for Australian bank stocks by reducing concerns about resource sector debt problems. This might also promote a 'buy Australia' sentiment among offshore investors, potentially leading to gains in bank stocks.

The 'buy the rumour; sell the fact' phenomenon refers to the risk that oil prices might rally in anticipation of the Doha meeting, only to fall if the actual agreement does not meet market expectations. This could lead to a sell-off after the meeting if the details are not as favorable as hoped.

Resource stocks are gaining support because the rally in commodity prices improves the outlook for these companies. Higher commodity prices can lead to increased revenues and profitability for resource companies, boosting investor confidence.

If both bank and resource stocks rally, the ASX 200 could see solid gains. This would be a positive development, especially since the ASX 200 has underperformed in recent weeks. A rally in these sectors could help lift the overall index.

A production freeze could limit the risk of supply increases, which might offset likely cuts in US oil production this year. This could help stabilize or support oil prices, benefiting producers who are facing challenges from lower prices.