Modest respite for commodities to steady market nerves

Some modest respite on the commodity front looks likely to produce a relatively steady open on the stock market this morning. Sellers may be a little cautious given solid gains in the oil price last night plus a small move in the right direction for the spot iron ore price.

However, despite overnight gains in commodity prices, investors will be far from confident that the bear markets are coming to an end. While spot iron ore prices were up yesterday, the fact that China’s steel production fell during March is a sobering piece of data for iron ore producers. Similarly, oil markets which appear to be rallying in anticipation of US production cuts will soon need the data to reflect expectations to maintain current upward momentum.

Stock markets are likely to be at least a little more cautious about the prospects of further rate cuts following yesterday’s decision by the RBA to leave rates unchanged.

While the RBA left a clear easing bias in place, its failure to cut rates does increase the data related risk to the prospect of further rate cuts. Although monthly economic data is volatile, we have seen some quite solid data sets recently including a drop in the unemployment rate, yesterday’s better than expected retail sales and moderate improvement in business credit growth. If these trends continue, the RBA may continue to be cautious about cutting rates further. Although a scenario like this might dampen investor appetite for yield stocks it could be a plus for other sectors of the market with the impact of an improving economy offsetting disappointment over interest rates.

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