The failure of the Doha meeting raises a conundrum for oil traders. Majority analyst opinion and commentary leading into the meeting was that a production freeze was unlikely and would make little difference to the market even if it was achieved. At the same time the oil price rallied significantly in the lead up to the agreement. This creates one of two possibilities, either the weight of money disagreed with financial markets commentary, or the oil rally was being driven by other factors.
Market reaction to the Doha failure will provide some useful insight over the next couple of days. If oil holds above support around $35, it will be clear that price gains in recent months have been mainly about the outlook for lower non-Opec production and a weaker $US. The Doha meeting and potential for a price freeze will have been shown to be not much more than a bit of “volatility froth” on top of an improved overall outlook for oil.
At this stage, the relatively muted reaction in the local stock market this morning suggests that investors and traders are cautious about reading too much into the Doha failure. Reaction on tonight’s European and US markets will provide greater clarity on its impact on global sentiment.
Banks have joined materials and energy stocks, in dragging the ASX 200 lower this morning. The potential for a Doha led correction in commodity prices brings focus back onto credit problems in the resource sector. The possibility of a weaker $A might also weigh on international investor sentiment toward Australian banks. Investors will be waiting on greater clarity about whether a more significant “risk off” correction on commodity currencies is going to emerge.
McGrath’s reduced profit guidance provides another warning that real estate and construction is setting up to become a headwind for Australian economic growth for a while. Reduced listings in North and North West Sydney combined with softer Chinese demand are likely to flow through to lower construction growth.