The global economy continues to show signs of improving as stronger manufacturing reports have helped cyclical commodities rallying strongly this past week.
The European sovereign debt situation has not gone away but fear of contagion was reduced somewhat this week as the ECB stepped in aggressively buying Irish and Portuguese government bonds. This saw the spreads over German government bonds reduced by more than one percent and helped investor sentiment.
The Euro which had been under severe pressure during November at one stage falling nine percent from the recent high versus the dollar recovered a few percent but the jury is still out as to whether this will be enough to steer the Euro zone out its problems.
Turning to commodities this is the time of year where the major research houses releases their outlooks for 2011 and based on those seen so far next year is building up to become another strong year for the sector. Cyclical commodities like energy and base metals are forecast to perform strongly on the back of a continued global recovery with the US market in particularly playing an important part.
China will undoubtedly apply the economic brakes further in order to reduce their inflation which is currently running at an annualized rate of eight percent. They have also recently introduced measures to reduce speculation in commodities. Whether these initiatives will have a detrimental impact on the demand for raw materials remains to be seen.
The Reuters Jefferies CRB index is up 3.8 percent at the time of writing, having recovered more than two thirds of the early November sell off, bringing the annualized gain to ten percent. The energy and base metals performed strongly on top of other strong gains from cotton, silver and wheat. Natural gas took a breather after recent strong gains showing a small loss on the week.
Gold having shrugged of the recent 100 dollar correction moved back to 1,400. This is within striking distance of the 1,425 dollar record set three weeks ago. The dollar decoupling has been noticeable across different commodities as markets have managed to rally despite the dollar strengthening at the same time. This decoupling helped gold priced in Euros to reach a new record high last Tuesday.
Turning to China the news that a local fund received permission to invest in gold ETFs outside the country caused some initial excitement. This initiative would make it possible for investors in mainland China, how faces negative interest rates on bank deposits and fear higher inflation, to invest in gold.
Copper also caught the headlines as it rallied strongly heading for the biggest weekly gain since July. The rally was brought about by fear that the economic recovery in the US, the world’s second largest consumer after China, and elsewhere could trigger supply shortages in 2011. The rally has been exacerbated by news that one single trader holds more than half of all available stock in London Metal Exchange warehouses.
Crude oil rallied strongly as cold weather swept across the northern hemisphere increasing the demand for products. Investors increasingly convinced that energy prices will be rising over the coming months have been adding to existing long positions. The global recovery especially in the US, the world’s largest consumer, continues to erode the elevated inventory levels.
WTI Crude has been stuck in a relatively tight range for more than a year now as present reality constantly was lagging behind the future expectations. As we approach 2011 and many economies, minus certain parts of Europe, continues to improve it looks as if reality is catching up with expectations. The flattening seen on the forward curve over the last month supports this assumption and could potentially lead the way to the existing range being broken.
Brent crude from the North Sea traded back above 90 dollars for the first time in two years on a combination of freezing temperatures and the economic recovery which has lead to an increase in demand. Just a month ago OPEC increased the top end of their comfort zone to 90 dollars and could find them having to adjust either that or increase production sooner than they would have thought necessary.
The price of wheat has rebounded strongly rallying 11 percent this past week due to reduced supplies of high quality wheat. The quality and quantity of the crop in Australia, the world’s fourth largest exporter, is deteriorating due to heavy rain while dryness in the US may limit the output of winter wheat. The dampness could result in the effected wheat will have to be downgraded for use as feed instead of the higher dryer quality that is used for milling.
With less than a month to go before the books finally closes below table shows the winners and the very few losers of 2010. Weather and economic uncertainty have been the main drivers throughout the year.
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