US Dollar the key to stock market moves

The stock market looks likely to open on a firm footing this morning after a big rally in US markets.  The early response of the Australian market to the big US move may be restrained by the fact that Asian markets had a significant rally yesterday, meaning the US was to some extent playing catch up.

The key to today’s trading is likely to be whether there is follow through buying of “yield” stocks like CBA and Telstra which was a big  feature of yesterday’s market. The strength of the $A may be a complicating factor here, potentially making offshore investors a little more cautious about Australian stocks this morning.

Since last Friday’s strong US Non-Farm Payroll data, world markets have been driven by expectations of an early start to the Fed’s rate hike program. Last night’s US retail sales data has shifted thinking on this, adding an element of risk to the early rate hike scenario. The market will look through the impact of February’s cold weather on upcoming US data. Even so, the retail sales figure was surprisingly weak and follows weak numbers in November and December. This creates concerns that low wage growth is continuing to keep a lid on growth and inflation in the US economy and has investors factoring in the risk of a later and slower approach to Fed monetary tightening than  seemed likely earlier in the week.

As far as equity markets are concerned, any follow through in US Dollar selling may reverse the scenario of the last couple of days. If the US Dollar continues to correct lower, stock markets outside the US may rally less than US markets. A weaker Dollar will take pressure off US company revenues and lessen the comparative advantage of companies elsewhere.

Resource stocks are likely to be a soft patch for our market on the open with lower oil prices and ongoing reaction to disappointing data on China’s economy likely to weigh on investor thinking.