US jobs data positive but weak iron ore and oil prices a market restraint

A strong lead from US stocks based on a ‘Goldilocks’ job number will see a solid start to stock market trading this week. However, the extent of any rally today may be capped by mixed results on commodity markets.

The November jobs data in the US was good enough to cement the case for the Fed to lift rates in December but not strong enough to concern markets about the pace of increases next year. At this stage, the large pool of disaffected workers with potential to return to the work force plus the high underemployment rate is keeping wage growth subdued. While this remains the case, the Fed is likely to stay cautious in its approach to monetary tightening.  This creates a positive scenario for stocks where the economy continues to grow but low interest rates support valuations for some time yet.

Friday’s not too hot, not too cold US jobs data was an ideal outcome for gold which rallied 2.3%. The combination of disappointment in the ECB’s stimulus package and reduced concerns about the pace of Fed rate hikes has seen a scramble to cover short positions. This could make gold stocks one of the highlights of trading today.

However, investor support for the wider resource sector today is likely to be constrained by ongoing weakness in spot iron ore and oil prices. OPEC’s decision to abandon its production target is really only a rubber stamping of reality given that the ceiling has been honoured in the breach for some time. However, removal of the ceiling is a symbolic recognition of the fact that OPEC is unable to operate a production cartel given current market circumstances.

While the ASX 200 index is likely to open higher today, the chances are that it will remain inside Friday’s large range.  In terms of momentum this will leave the market in an indecisive position with a rally above Friday’s high around 5228 needed to provide confidence that a Santa rally is under way.