Momentum still the core driver for stocks

The relief rally in stocks continues to build on itself now that markets have stopped falling. In the absence of an obvious macro drive for the sell-off in early January, the very fact that markets were under pressure was one of the main sources of investor concern. While upward momentum is building, investors remain skittish and markets are vulnerable to bad news. In short, volatility looks set to continue.

The recent bounce in commodity prices is a key part of the current relief rally. The materials and energy sector is likely to attract buying again today.

The oil market remains well over supplied and rallies are likely to be capped. However, in the medium term, there are now also risks to the most pessimistic outlook scenarios. Traders are conscious of the possibility that signs of cuts in Non Opec production may soon start to emerge However; it seems fairly unlikely at this stage that Saudi and Russia will cut production at the cost of their market share as suggested by Iraq’s oil minister.

While other commodities are recovering from recent lows, gold is pushing past its January peak. Rising holding in ETFs and news of strong imports into China via Hong Kong suggest that it has attracted safe haven buying during recent market volatility. While this is good news for Australian gold mining stocks, investors will be balancing this against the negative impact of the stronger Australian Dollar.

Apple has confirmed market fears by reporting a decline in iPhone sales and providing guidance of worse to come in the first quarter. After market reaction has so far been relatively limited in light of the declines already seen in Apple’s stock price. However, revenue momentum is soft and nervousness about Apple’s growth prospects look set to continue over coming months.