Rocky ride for metals, enthusiasm fades
Rocky ride for metals, enthusiasm fades
Fri Jun 9, 2006 6:24 PM GMT
By Martin Hayes
LONDON (Reuters) - Prices of leading base metals and gold were jumpy on Friday as storm clouds gathered in a rising interest-rate environment, which suggests global economic growth may sag.
Copper, used in wiring and construction, at one point extended Thursday's six percent fall, dropping to $7,215 a tonne, the lowest for one month. It then bounced back up to $7,575 before ending open outcry trade at $7,200, down $90.
"The dollar has a bit of life at the moment, and higher interest rates are hurting equities and the demand outlook," Nick Moore, analyst at ABN Amro, said.
A renaissance in the dollar this week has caused funds to take money out of the previously booming commodity sector.
The currency rose in response to the hawkish stance of the U.S. Federal Reserve pointing to an increase in inflation which could trigger a rise in U.S. interest rates later this month. In turn, higher interest rates would slow growth.
Metal markets were battered by speculative selling on Thursday and weakness spilled over into other markets, dragging mining equities lower.
However, Britain's FTSE 100 forged higher on Friday as investors took advantage of the dip in prices and snapped up miners and energy stocks.
Merrill Lynch said in a review the recent pullback was a buying opportunity. "Given the magnitude of today's EPS (earnings per share) upgrades, we see compelling value-buying opportunities," it said.
"Investors who favour a more defensive stance can look to the diversified miners...for partial insulation from the ongoing volatility of the screen-traded LME metals."
The investment bank added that it was nevertheless closely watching for any sign of OECD demand weakness.
NO ONE-WAY BET
Investment funds have been the powerhouse behind the commodity bull market, but have been closing some positions now that the sector is no longer a one-way bet, analysts said.
"These markets need more time to settle down -- this is a consolidation phase we are going through," a fund source said.
Given the sharp run-up in base and precious metals prices, some fund managers and investment banks were now eying the agricultural commodities, which have relatively underperformed.
James Gutman, senior commodities analyst at Goldman Sachs, said farm products could become attractive again thanks to strong demand from a booming biofuel sector.
"Five years from now, we could be looking at a grain market that looks a lot like the oil market today," he said.
Record high oil prices have propelled biofuels from niche player into the multi-billion-dollar commodity mainstream, causing an explosion in new ventures and investor interest.
Gold has suffered, falling heavily from multi-decade highs it reached last month at $730 an ounce. Prices, which lost three percent on Thursday, bounced to end European trade at $615.30/616.30 by 1535 GMT, up from $609.50/610.20.
"The power and coordination of the central bank offensive against inflation is notching up gold as a major casualty," broker HSBC said in a report.
Investors tend to buy gold as a hedge against a weak dollar and inflation and sell when the market moves in the opposite direction.
Oil futures bounced back above $71 a barrel as violence continued unabated in Iraq, dashing some hopes the killing of a top al Aqeda leader would turn the tide for the country's struggling oil sector.
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