Five days - that’s how long it took global financial markets to
recover before another cocktail of bad economic news combined with
disruptive political announcements removed what little courage had been
mustered. This sent global stocks and some commodities into a tailspin
while government bond yields reached record lows and gold continued its
record breaking run to the upside. In the week ahead focus will be on
what comes out of the annual meeting of global central bankers as last
year’s outcome sent commodities on a month rally.
Non-cyclical commodities support the index
The Reuters Jefferies commodity index was nearly flat on the week as weak performances from energy and base metals were offset by strong rallies among soft commodities and especially precious metals. The best performing commodities year to date are not surprisingly gold and silver followed by corn as risk adversity and weather more than growth factors have been the main drivers.
The Reuters Jefferies commodity index was nearly flat on the week as weak performances from energy and base metals were offset by strong rallies among soft commodities and especially precious metals. The best performing commodities year to date are not surprisingly gold and silver followed by corn as risk adversity and weather more than growth factors have been the main drivers.
Anniversary of QE2 approaches
As we approach the annual gathering of global central bankers at Jackson Hole on August 25-27 attention will turn to what Federal Reserve Chairman Ben Bernanke says. Last year he used this venue to announce the second round of quantitative easing which in turn helped trigger a month-long rally in commodities and other assets. With inflation on the rise his options will be limited this time around but the market will nevertheless be looking for guidance on where U.S. monetary policy is heading.
As we approach the annual gathering of global central bankers at Jackson Hole on August 25-27 attention will turn to what Federal Reserve Chairman Ben Bernanke says. Last year he used this venue to announce the second round of quantitative easing which in turn helped trigger a month-long rally in commodities and other assets. With inflation on the rise his options will be limited this time around but the market will nevertheless be looking for guidance on where U.S. monetary policy is heading.
Bond yields tell desperate story
While stock markets plunged government bond yields fell to the lowest levels in decades on weaker than expected U.S. manufacturing and unemployment data. In Europe weak economic data together with rising fears about the financial health of some of its banks added to the negative sentiment and triggered a rush towards secure government bonds.
While stock markets plunged government bond yields fell to the lowest levels in decades on weaker than expected U.S. manufacturing and unemployment data. In Europe weak economic data together with rising fears about the financial health of some of its banks added to the negative sentiment and triggered a rush towards secure government bonds.
Gold surpasses its 2010 performance
During the week financial markets tried to stabilise and the Swiss franc sold off from its extreme levels reached in the previous week as the Swiss National Bank stepped in bringing the deposit rate for SFr below zero. Instead of moving into riskier assets investors went for gold, thereby helping it to rally 7 percent on the week to a stunning 31 percent gain on the year, thereby surpassing its 2010 return of 26 percent.
During the week financial markets tried to stabilise and the Swiss franc sold off from its extreme levels reached in the previous week as the Swiss National Bank stepped in bringing the deposit rate for SFr below zero. Instead of moving into riskier assets investors went for gold, thereby helping it to rally 7 percent on the week to a stunning 31 percent gain on the year, thereby surpassing its 2010 return of 26 percent.
Just like the 50 dollar level for silver earlier this year became a
magnet for speculators we can now expect them set their eyes on 2,000 as
the next target for gold. However as the upside momentum has increased
so too has the likelihood of further margin increases on the futures
contract. Whether that would have a negative impact considering the
strength of the move remains to be seen but as the price continues to
climb so too does the risk of a sharp correction.
Oil roller coaster
Crude oil had by mid week recovered strongly from the early August sell-off before risk adversity returned with a vengeance sending WTI lower by seven dollars and Brent by five dollars. Brent is holding up much better than WTI with the spread between the two having widened to a new record above 26 dollars. This widening reflects supply disruptions in the North Sea and Africa and the worry that the economic slowdown will be skewed towards developed economies while the supply and demand situation in Asia remains tight.
Crude oil had by mid week recovered strongly from the early August sell-off before risk adversity returned with a vengeance sending WTI lower by seven dollars and Brent by five dollars. Brent is holding up much better than WTI with the spread between the two having widened to a new record above 26 dollars. This widening reflects supply disruptions in the North Sea and Africa and the worry that the economic slowdown will be skewed towards developed economies while the supply and demand situation in Asia remains tight.
Brent crude has been trading within a 22 dollar-wide range over the
last five months and given ongoing worries about an economic slowdown
price action in the weeks ahead is seen at the lower end of this range.
This leaves the price supported at 98 dollars while resistance above 111
looks firm for now. High oil prices have contributed to the current
slowdown and the lower prices we are now seeing could help some
economies from falling into a double dip recession. This would hold
demand destruction at relative low levels and ultimately keep the
outlook for higher prices in the future alive. Near term, however, oil
traders will be taking their cue from stock markets as continued selling
there will keep oil prices under pressure.
Abundant Russian wheat
The price of European wheat has remained range bound despite upside pressure on American exchanges, especially high quality spring wheat traded on the Minneapolis Grain Exchange. Helping keep prices in Europe under control has been news from Russia that its grain production will be above 90 million tonnes, higher than previous expectations. This comes after the disastrous heat wave last year which destroyed a large chunk of its production and triggered an export ban which was only lifted in July. In its effort to regain international market share Russia has been taking business from the U.S. by undercutting prices and with nearly 30 million tonnes more grain produced this year there will be plenty to sell.
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