London: Copper, oil and other growth-linked commodities may benefit this week from the G-20’s hardened stance towards exchange rates, but anticipation of more US policy easing is likely to remain in the spotlight.
The group of 20 major economies agreed on Saturday to shun competitive currency devaluations but stopped short of setting targets to reduce trade imbalances that are clouding global growth prospects. This consensus could prove positive for risk assets, although the meeting yielded no major policy imitative and nothing close to the grand bargain in which participants would agree to allow their currencies to appreciate that some more optimistic market watchers were hoping for.
“There’s some token partnership in working together, but there’s nothing formal that’s going to change the amount of liquidity,” said Patrick Armstrong, a fund manager with Armstrong Investment Managers
“The same forces that have been driving commodities up over recent months will remain and countries will continue with short-term thinking about trying to give themselves competitive advantages.”
For the commodities complex, much will depend how the outcome of the G-20 is viewed by the foreign exchange markets.
The possibility of an all-out currency war that could, in turn, have triggered greater protectionism and further weighed on global growth, seems to have been averted for now, which could embolden investors to take on more risk at the expense of perceived safe havens such as gold.
But the prospect of mass-scale bond purchases that most expect the US Federal Reserve to detail at its next policy meeting on 2 and 3 November could prove a more powerful driving force for the markets.
“There are fundamentals of supply and demand in various of these base metals, but what’s really driving the markets these days is what the dollar is doing,” said Gary Mead, an analyst with Virtual Metals.
“I’m afraid I take a rather dim view of these meetings anyway. I think they are generally quite promising ... and then don’t translate into any hard action,” he said. “Everybody expects ... the US to do its second round of quantitative easing, so the question is to what extent that expectation is going to drive things, much more than what the G-20 says.”
Gold is now around 4.5% below the record high struck at $1,387.10 an ounce on 14 October after the US dollar rose last week for the first time in five weeks.
Yet the price is still on track for a 21% gain this year, largely as a result of investor concern over the European sovereign debt crisis, slowing US growth and the risk of China’s economy overheating.
The gold price ended last week with a 2.3% loss, marking its first week of decline since early August as the strength in the dollar eroded investor appetite for non-yielding assets and other dollar-priced commodities. Virtual Metals’ Mead said copper could build on Friday’s gains, supported by evidence of demand continuing to outpace supply. This tighter fundamental backdrop coupled with the recent weakness in the dollar has pushed London Metal Exchange copper futures to their highest in over two years.
Three-months LME copper futures ended last week with a 0.8% loss at $8,334 a tonne.
Nod to emerging power
At the meeting in South Korea, G-20 finance ministers recognized the quickening shift in economic power away from western nations by inking a surprise deal to give emerging nations a bigger voice in the International Monetary Fund (IMF).
Raw materials such as copper and oil depend heavily on demand from emerging economies, and in particular China, the world’s top consumer of a number of key commodities.
“There was not that much expected out of it. There was always a risk of it bringing a surprise and they managed to provide a surprise with the IMF (two seats),” said Olivier Jakob, an analyst with Petromatrix.
“That’s a surprise, but it does not really do anything to trading the dollar next week,” he said, adding: “Oil market supply and demand are relatively well-balanced. It’s going to be difficult for crude oil to move higher if there is not continued support from the correlation with the dollar.”
International benchmark US crude oil has traded in a mostly $70-$85 range all year. It began rising towards the top of that range in September and this month hit five-month highs above $84 a barrel in response to expectations of further quantitative easing and a falling dollar.
Analysts say without the dollar effect, the market would have been under pressure from high levels of inventory in the United States, the world’s biggest oil burner.