V is for volatility. And while higher commodity prices and some settling on Wall Street overnight should provide the basis for a partial recovery of yesterday’s heavy falls, investors will be in for a bumpy ride over the next few weeks (see Carr's Call: Four danger signals for domestic investors).
Bricks and oil are likely to dominate trading today. Building approvals for May are likely to show a decline of around 1%, or a 0.1% drop on an annualised basis.
That follows a strong rise in April and yesterday’s sharp rise in new home sales, providing evidence that construction in the non-resources sector has begun to recover. Building approvals statistics tend to be lumpy, so month-to-month figures can be misleading.
Oil prices, meanwhile, continue to spike. The coup in Egypt that deposed President Morsi has ricocheted through oil markets, which already had been nervous over the events in Syria, sending oil prices to 14-month highs.
While Egypt is not an oil producer, much of the region’s oil supply runs either through or parallel to the country and any threat of disruption will impact oil markets. An unexpected decline in US oil inventories overnight also pushed prices higher.
Australian fuel prices already are being driven higher by deflation in the currency. When combined with the oil price hike, that is likely to significantly lift costs for transport-related industries and stocks.
On a broader front, European debt problems again are starting to bubble to the surface. Portugal’s foreign and finance ministers both resigned overnight, signalling further instability in southern Europe.
While the country remains committed to the austerity packages that accompanied its most recent bail-out, any chance it would resume normal debt refinancing within the next year now seem remote. Fuel and Portugal contributed to the falls on European markets overnight.
Higher commodity prices, however, should deliver a lift to resource stocks that yesterday came under serious pressure (see Brendon Lau's Mining for a ROE revival).