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The Bloomberg Commodity Index put on 3.9% last week and added another 1.2% on Monday. Brent hit the $40 level. Iron Ore spiked 18.6%, jumping above $60 per metric tonne.
Is there a turnaround in commodities, finally? Tellingly, global equities were not showing a clear sign, pulling in various directions. This suggests that the commodity resurgence may be driven by sentiment rather than reality. The fundamentals underpinning major commodity classes remain intact, namely, China slowdown, emerging markets deleveraging, relative dollar strength and oversupplied conditions.
Furthermore, there was nothing much in China’s National People’s Congress to raise hopes that China will gobble up global commodities once more. At most, the risk of a hard landing has diminished, after Beijing made the decision to increase policy stimulus.
The tepid moves in Australia and Japan this morning showed that market participants remained unconvinced of the viability of a trend reversal in commodities. However, we should not discount the possibility that a period of stabilisation may ensue in the near term. That said, Asia may likely be stuck in directionless trade today, and depending on how investors perceive the over 5% surge in oil, there could still be a positive undertone in risk markets.
The recent gains in euro exhibited signs of fatigue as Thursday’s ECB meeting looms. There is strong expectation of additional easing around the meeting, which means EUR/USD could weaken. Specifically, the market is expecting a cut in the deposit rate by 10bp to -0.4% and an increase in the asset purchase programme (QE) by EUR 10bn to EUR 70bn. Any increases more than that would surprise the markets and push euro lower. An extension of the QE programme is also anticipated as part of the easing measures. However, we have been in this situation before, and here lies the key risk. If we see a repeat of the December meeting where market expectations of an aggressive easing were disappointed by mild ECB action, a fresh bout of market volatility and a strong surge in the EUR are not remote possibilities.
The S&P 500 is still pushing higher, with the index clearing the 50-day simple moving average since the start of March. It is now trying to take out the 100-day SMA but strong market breadth suggests that the rally may taper off. The percentage of member stocks above their respective 50-day moving averages is now above 80%, which normally is a level that can signify reversals. The flat close last night seems to support this possibility, although we need further price action to confirm. More worrying is that investors are sceptical about the March rally.
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