Stock market risk adjustment complete

The equity market’s adjustment to remove the uncertainty risk premium built into prices after the weekend attacks in Paris has been quick. Investors are again returning focus to the underlying macro themes confronting markets for the remainder of the year.

Whether or not yesterday’s rally in stock markets can get under way again over coming days may rest on a couple of issues. The first will be whether yesterday’s buying momentum in major non-mining stocks resumes despite the fact that upward momentum in US markets stalled last night.

Another weak session in commodity markets is also likely to weigh on Australian markets today. Buying support for energy stocks in the US was reversed last night and we may see the same here today as traders take a safety first approach prior to release of this week’s oil production and inventory data in the US.

US inflation data left the chances of a December rate hike by the Fed intact. It’s encouraging to see signs of improvement in services sector inflation as the US labour market improving. Markets appear confident that the underlying domestic economy is now strong enough to tolerate the early stages of a monetary tightening cycle.