Investors rotate out of commodities and into bonds

International markets on Friday bore the hallmarks of a low growth, low inflation world economic environment. Traders bought bonds and sold commodities in response to a weaker than expected read in the US employment cost index for the 2nd quarter. The employment cost index failed to reveal any promise of much awaited wages growth as high underemployment rates provide little incentive for employers to pay more.

The fact that the US Dollar rallied after initially selling off on this news reflects a view that both the economy and labour market are doing well enough for the Fed to make a start on lifting rates this year. However, while wage rates remain low, the pace of interest rate increases will be very slow and unlikely to pose a significant threat to stock valuations. The fact that investors are pushing bond yields lower again reflects and outlook for very gradual increases in the Fed rate against a backdrop of ongoing low to moderate inflation levels.

The Australia 200 index has arrived at a zone of potential chart resistance around 5700-5720 consisting of the June and July peaks. This together with Friday’s decline in key commodity markets like iron ore and oil could see a subdued day’s trading with some softness in the materials and energy sectors. Investors and traders in mining stocks will now be waiting on the first of the major profit reports due from Rio Tinto on Thursday.

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