A relief rally in oil and commodities markets after a last-minute US debt deal is likely to prove short-lived, while US and European debt problems remain far from being solved and economic data raise fears of a new global recession. Analysts said on Monday concerns about a double dip in Europe and the United States combined with signs of a slowdown in the Chinese economy will push gold - the ultimate safe haven these days - to new highs.
"There is every possibility that it is a fool's rally - a kind of thank you to the man holding you hostage for a reprieve that turns out to be only temporary," said David Hufton, managing director of brokers PVM Oil Associates. Oil, metals, grains and soft commodities all rose on Monday and gold fell after US Congressional leaders agreed on a deal to avert default.
But by 1200 GMT the rally had lost steam. Oil was up only $1 per barrel compared with gains of $3 per barrel during Asian trading. Republican and Democratic lawmakers were expected to vote later on Monday on a White House-backed deal to raise the United States' $14.3 trillion borrowing ceiling and cut $2.4 trillion from the deficit over the next decade.
"The addict has been given another big fix. It is still an addict and a hopeless one at that. It's clear that the deficit is not under control," says Tom Winnifrith from t1ps Investment Management, which invests in small-cap gold and metals companies. "The problem is that people are not fooled by official data. They just know the numbers do not stack up even if the credit agencies will not dare to admit it yet," said Winnifrith.
He said he believed the US triple AAA rating would be cut soon and that gold would rise by more than a quarter from its recent all-time high of above $1,600 an ounce before Obama faces re-election in November 2012. US GDP came out much worse than expected last week and the market is awaiting non-farm payrolls data on Friday with talks of a double-dip recession already resurfacing.
"The problems of the high indebtedness in the United States are not going to disappear just because of any agreement. Markets are going to start asking questions about US debt in the longer term," said analyst Eugen Weinberg from Commerzbank. Amrita Sen from Barclays said the bank's economists viewed the debt deal as not large enough to stabilise the debt/GDP ratio in the long run. "And thus, perhaps more than just one sequel is very likely until the overall asset market balance and a stable economic growth trajectory is restored on a sustainable basis," she said.
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