January and February were tough months for markets around the globe, with Chinese concerns, European bank issues, and continued commodity weakness sending world markets lower. However since mid-February, world indices have staged a strong rally and now sit only slightly down on the year. For me this is mainly down to the bounce in commodity prices, especially oil. This has pushed indices like the FTSE 100 higher due to energy companies accounting for 25% of the index's makeup.
Commodity strength helps stocks
The strength of oil and other commodities has pushed up equity prices. However this may be about to change. Oil prices have struggled to make a clean break from around US$40 and could be set for another leg lower. Copper and iron ore could soon follow and we could see similar-sized falls to January in the short term. Gold and silver have also performed well and may be more stable in a general sell-off but could still see some weakness. China is key for commodity prices. When we see good economic data from China, commodities rise. If we continue to see weak data from China with demand for metals and commodities falling, then we should see pressure on equities around the world.
China is still a big concern
China hasn't been in the business news much over the last month during the recent rally, however it is still a major concern. Every week more and more bad data is coming out of the country and the likelihood of a 'hard landing' for the Chinese economy is increasing. This will have a huge effect on equities around the world and could spark a massive sell-off in stock and bond markets. But if the Chinese economy continues to grow in the 6.5% range then we should see confidence increase regarding the country and the Asian region in general.
Are we destined for a long bear market?
Nobody can deny there are serious economic headwinds around the world. Even so, central banks are doing all they can to stimulate the global economy. Only last week the ECB announced a further rate cut and boosted QE by EUR20bn ($22bn) a month. This sent markets slightly higher and should provide investors with some sort of comfort. It remains to be seen if this is enough to restore confidence in markets and the economy, but it certainly moved global markets higher in the short term.
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