Commodities' price performances will increasingly diverge this year, with supply and demand fundamentals in each market exerting a stronger role, as economies start to recover and more than three years of monetary stimulus come to an end. The European Central Bank announced its latest stimulus this week, providing half a trillion euros of cheap three-year loans to 800 banks.
But the ECB also warned that no further injections were planned. US Federal Reserve Chairman Ben Bernanke in testimony to Congress this week also failed to signal any further stimulus. "As we go into the second quarter, I think it will be more interesting. You will see correlations (within commodities) breaking down and differences within the base metals space; it will be more important to discriminate," said fund manager Pau Morilla-Giner at London & Capital.
For the immediate future, banks are expected to use the bulk of the cheap money to pay down their own debt, but the funds will still also indirectly keep boosting commodities and other risky assets, banishing the threat of a credit crunch and freeing up funds for investment.
"You can view it as being the last tranche, but it's still a very substantial amount of money injected into the system and will need to go somewhere," said Nic Brown, head of commodity research at Natixis in London. Commodities rebounded in December following months of sharp losses when the ECB dished out the first tranche of cheap loans. The 19-commodity Thomson Reuters-Jefferies CRB index has gained about 11 percent since December 15, a few days before the first ECB injection of 489 billion euros.
Within the sector, oil is the best performer, with Brent crude jumping nearly 20 percent in the same time period amid the stimulus and concerns over tension between the West and Iran. "While the recent rally in Brent crude ... can so far be mostly explained by central bank liquidity, rising tensions in the Middle East could easily add another $20 to $40/barrel to oil prices," said Bank of America-Merrill Lynch strategist Francisco Blanch in a note. Excess liquidity also boosted industrial metals, which have jumped 18 percent since December 15 despite nagging concern about demand from global top metals consumer China.
"It's the continued irony of the base metals market that actually during January and most of February, fundamentals were not that great," said commodity strategist Nicos Kavalis at RBS. Commodity markets are set for a more bumpy phase later this year, however, as the effects of this liquidity wane and central banks fail to replace it with new stimulus measures.
"In the short term, markets would like to have more stimulus, but we all now that is not a healthy way to deal with the patient," said Morilla-Giner, who runs London & Capital's $320 million Global Commodities Fund. "If we don't see more stimulus and data is sort of good but not great, the volatility is not going to go away. The scope for disappointment is always going to be huge."
Investors can expect more ructions similar to what happened to gold on Wednesday, which rose early in the day after the ECB stimulus move and then plummeted after Bernanke's testimony. Gold nose-dived by over $100 or 5 percent on Wednesday, including about $35 in a matter of minutes, in the biggest one-day drop in three years.
A further depressing influence will come as governments adopt austerity measures to cut their massive debt burdens, creating an economic environment in which investors will have to be more selective in picking commodities. London & Capital likes gold due to the continued low interest rate environment and oil because of political tensions, with exposure to both mainly through call options.
Other investors are bullish that gold will hold up despite the lack of fresh stimulus due to stubborn inflation, central bank purchases and emerging market demand for the metal. Base metals may be vulnerable if data from China is disappointing, Brown said. "We think that the beginning of this year in China is surprisingly weak ... There could be some surprisingly poor numbers yet to come out of China in the weeks ahead."
Continued gains in oil also will threaten most other commodities and risky assets as oil prices start to erode global growth, he added. "We think that anything above $125 in Brent starts to cause some real pain in various parts of the world ... if oil prices continue to trade higher, we will see negative correlation between oil and other risky assets, equity markets in particular." Brent surged 5 percent to an 11-month high on Thursday on fears of supply disruption in Saudi Arabia, but edged below $125 per barrel on Friday.
Comments
Comments are closed.