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