Markets wait for fundamentals to catch up
The cautious tone evident in the market yesterday afternoon looks like continuing this morning.
Rising commodity prices have been a key driver of recent stock market confidence. However, with upward momentum and short covering in commodity markets coming to an end last night, investors will feel less need to chase stock prices.
Stronger commodity prices are a relief for markets but the recent rallies have not so far been supported by any major changes in supply balances. Commodity prices have probably reached the point where they need to take a breather. They need to wait for more tangible evidence that underlying fundamentals can support these higher price levels on a sustained basis.
The higher prices get, the more vulnerable they will become to a lack of follow through good news. This week’s rally in oil prices has increased the market risk associated with the weekly US oil production data due for release tonight.
Tomorrow’s ECB meeting also gives traders a reason to be cautious. Markets are expecting significant action from the ECB. Many see this as ECB’s last chance to provide a stimulus shock. The markets jaded response to the Bank of Japan’s latest stimulus means reaction to what the ECB does is more difficult to assess. Tomorrow’s ECB’s meeting is a potential source of volatility that could impact currencies, commodities and equity markets
Frequently Asked Questions about this Article…
Rising commodity prices have been a key driver of recent stock market confidence because they often signal economic growth and increased demand. However, when these prices rise without changes in supply balances, it can lead to cautious investor behavior.
When commodity prices need to 'take a breather,' it means they have reached a level where further increases are unlikely without new supporting evidence. This pause allows the market to assess whether current price levels are sustainable based on underlying fundamentals.
Higher commodity prices become vulnerable when there is a lack of follow-through good news or supporting fundamentals. Without continued positive developments, these prices may face downward pressure.
The weekly US oil production data can significantly impact the market by influencing oil prices. A rise in production might lead to lower prices, while a decrease could support higher prices, affecting market risk and investor sentiment.
The upcoming ECB meeting is significant because markets are expecting substantial action to stimulate the economy. This meeting is seen as a critical opportunity for the ECB to provide a stimulus shock, which could influence currencies, commodities, and equity markets.
The ECB meeting might create market volatility because traders are anticipating significant actions. Depending on the ECB's decisions, there could be fluctuations in currencies, commodities, and equity markets as investors react to the news.
The market's response to the Bank of Japan's latest stimulus has been jaded, indicating that investors may be skeptical about the effectiveness of such measures. This skepticism adds uncertainty to how markets might react to the ECB's actions.
Investors should be cautious about chasing stock prices because recent rallies in commodity prices have not been supported by major changes in supply balances. Without solid fundamentals, high prices may not be sustainable, increasing the risk of a market correction.
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