Commodities lead as stocks and bonds pause

Tesla, man and machine

Commodity markets stepped up to the plate in overnight trading. Market confidence illustrated by a weakening US dollar fed a rally in energy and base metals. Iron ore and Brent crude oil stood out. Share markets marked time as analysts and investors pored over results, and bond markets eased slightly after recent routs. Inflation data released over the next 24 hours could feed into the current market narrative, especially if readings come in higher than forecast.

The current market consensus of a strong economic recovery over 2021 supported by highly accommodative fiscal and monetary policy is vulnerable to higher inflation readings. Rising prices could tie the hands of central banks, forcing them to curb or reverse their support. Any indications of central banks tapering liquidity operations, for example, could have a dramatic impact on stock markets in particular.

China and Japan are first to report, with CPI and PPI readings tonight. Neither are expected to rock the inflation boat. However, tonight Germany and the US release CPI numbers. In both cases, core readings are already above 1.5% per annum, and trending towards US Federal Reserve and European Central Bank targets at 2%. Any acceleration of the trend may rattle investor nerves.

This potential response speaks to the recent divergence of bond markets. Shares and commodity prices reflect a “sweet spot”, where growth is strong enough to drive higher profits but not strong enough to curtail government and central bank support. However since the first week of January, bonds have indicated a higher interest rate environment. These opposing views are mutually exclusive.

US corporate reporting continues, with 325 of the S&P 500 announcements in. Twitter (EPS $0.38, forecast $0.29) smashed consensus estimates as active users grew by 5 million over the quarter, and its shares are higher in aftermarket trading.  Tonight shareholders will hear from General Motors (EPS f/c $1.56), Under Armour (EPS f/c -$0.07), MGM Resorts (EPS f/c -$1.00) and Paycom (EPS f/c $0.80).

It’s also an important day for corporate Australia. The largest listed company, Commbank (CBA EPS $2.13, f/c $2.07)) has impressed analysts with a comprehensive lift across its businesses. Mineral Resources’ report is also above estimates, but IAG and Cimic may have missed their mark. Please see CMC’s running reporting season commentary for more details.