The share market looks set for a cautious start this morning. Ongoing support for mining stocks may be offset by general investor caution ahead of tonight’s US job data and the upcoming profit reporting season.
US dollar weakness was the catalyst for yesterday’s stock market rally and the impressive gains in commodities. Economic data last night did nothing to dispel concerns that US economic growth is moderating. This led to another weak session for the Greenback as markets wind back expectations for Fed rate increases.
US initial jobless claims rose last week. They are still below levels that are likely to cause real concern but the trend has been creeping higher in recent weeks. These signs of slight deterioration in the labour market are consistent with other indicators of softening US economic growth like the Markit Services PMI. Whether this shows up in weaker job growth either tonight or over the next couple of month will be crucial to the Fed’s next move and the US dollar.
With the exception of oil, ongoing US dollar weakness led to further overnight gains in major commodities, especially gold. The new downtrend in the US dollar changes the short term outlook for gold. It also appears to be benefitting from safe haven buying relating to the Chinese economy. Gold stocks are likely to be a bright spot for the stock market today.
While buying in mining stocks looks set to continue in early trade, the quick loss of momentum in the oil rally may weigh on market sentiment. Initial short covering in oil based on US dollar weakness has faltered in the face of ongoing supply surplus and continued build in already massive inventory levels. While many are beginning to look toward a more balanced oil market over the next year, the question for traders is whether a forward looking rally can build from here. Supply pressure is likely to be intense in overcoming months and considerable downside price risk remains. Whether or not price can get past near term resistance around $35 in the US oil price looms as a key test for market sentiment.