Expectations of cuts to interest rates and iron ore production steady market nerves

A relatively stead open looks likely this morning as stock market investors ponder the implications of a raft of conflicting news.

On a positive note the sharp drop in the Aussie Dollar will help allay concerns about the negative consequences of a major upward correction in the currency for many stocks. This correction appears to have been triggered in part by mounting expectations the RBA will cut rates next week following a press story yesterday.

Growing expectations of a rate cut may also help put a base under bank stocks prior to upcoming profit reports.

Another drop in the spot iron ore price yesterday would normally set a negative tone for mining stocks. However, this may be offset by news that Vale will consider mothballing its high cost iron ore production if prices weaken. Reports suggest this could see 30m tonnes taken off the market if the iron ore price looks likely to stay below $US 50 over the medium term.

The oil market appears to be getting increasingly confident about the prospects of reduced US production over coming months. This upward momentum in oil prices continued last night and should be a positive for local energy stocks today.

While lower US stock markets will have a negative influence on local market sentiment this morning, investors may be encouraged by positive economic news from the world’s largest economy. News that US wages grew 2.8% over the year to March plus a drop in initial jobless claims are optimistic signs for the US economy. While confirmation will be required; these signs of an improving labour market set the economy up for improved growth after a disappointing March quarter. It also suggests that the big drop in job growth in March may simply have been due to the lagged impact of cold winter conditions.

The release of China’s official PMI this morning has the potential to influence market sentiment. Investors will be on guard following the previous release of HSBC’s softer than expected Flash PMI for April.