market comentry fat prohets

Market Comments

In our market comment published earlier this week, we commented on the likelihood of the ASX200 holding above the March lows. While we have been confident that the lows would hold, this hasn't been the case, with the index today dropping below 5000. The commodity sector has been the culprit this time, which is not altogether surprising. As we wrote this week:

"But with inflation at risk of getting out of control, the Fed has now signalled it is done cutting rates, and the next moves will be higher. The European Central Bank (ECB) is set to raise rates again this week so any co-ordinated tightening could have a short term negative impact on the commodity sector.

"As such, any weakness in the large commodity stocks (which have been supported by strength in the energy and bulk commodity markets) may see the index break below the March lows."

For some reason, the commodity sell began yesterday. There has been no identifiable catalyst for why, apart from continuing bad news coming out of the US. The deflationary impact of the credit market turmoil is moving to the resource stocks.

Our best guess is that the new financial year has seen a wave of profit taking on the large resource stocks. Combined with the effects of deleveraging (withdrawing funds from the equity markets to pay down debt and margin loans etc) this is causing a correction across the resource sector.

But the commodity markets remain strong. Gold and oil were both up overnight and copper rallied very strongly. The US dollar remains under pressure, which should support commodity price strength.

This is one tough market, and it looks like the index wants to head lower. So prepare for a few more months of pain.