Commodity price strength augurs well for stocks into year-end, JP Morgan says
The rebound in commodity prices will support company pricing and profits, while helping to put in place a base for inflation readings and leading to higher bond yields, providing a key catalyst for stocks to gain into year-end, although North Korea remained a 'wild card', analysts at JP Morgan told clients.
In their view, commodity prices would remain "firm" in the backhalf of 2017, thanks to a "healthy" global demand-supply balance.
With the typical two to three month lag, that should see inflation prints "stabilise", they said, with weakness in the US dollar helping in that respect.
Linked to the above, they noted how "significant gaps" had opened up between commodity prices and global factory purchasing managers' indices, on the one hand, and 10-year inflation break-evens and 10-year Treasury yields in the States.
Both were expected to close and higher government debt yields were supportive of Banks and Cyclicals, JP Morgan said.
The investment bank also noted how most sectors had a positive correlation to producer prices.
However, by regions, emerging markets were likely to again be the key beneficiary of rising commodity prices, with the historical correlation between the two remaining "strong".
"The historical positive correlation between the relative performance of EM equities and commodities remains strong. In addition, the move up in commodities supports our last week's upgrade of Capital Goods. Our sector analysts believe that mining capex will improve more than what consensus expects."