Global economic issues drive commodity prices

Commodity prices in the last week were mainly influenced by news and development on the global economic front. Even though economic data from the US came on the positive side, what led to risk aversion in the financial markets was the concern over the Greece front. Performance on commodities like Gold, Copper and Crude oil was mixed during the week as uncertain and unresolved economic issues dented optimism over recovery in the US.
Base metals ended on a mixed note in the last week as mixed economic data coupled with concerns over the Greece front limited gains. But positive news related to Greece on Friday helped revive positive sentiments in the financial markets. During the week, the US Dollar strengthened as concerns over Euro zone and its debt woes led to risk aversion. But the currency gave up gains on Friday as Greece asked for a bailout from the European Union (EU) and the International Monetary Fund (IMF).

Gold prices came under pressure in the last week as the dollar strengthened. But demand for gold could resume as a safehaven in uncertain financial markets. Even though economic data from the US and China has been positive, uncertainty in the Euro zone over the debt issue continues. Financial markets still remain susceptible over debt issues in the Euro zone as the EU lifted its estimate for Greece's deficit to 13.6% of gross domestic product. Ireland overtook the southern European nation as the EU member with the largest deficit of 14.3%. Other member nations debt issues in the Euro zone remain a cause of concern and this factor will dominate movement in the Euro.

But gold prices could rise in the coming days on expectation that signs of inflation will revive demand for the metal as a store of value. India the world's largest buyer of gold jewelry faces inflation of almost 15% and consumer prices in the UK too climbed 3.4% in March. Accommodative policy by the US government is also raising risk of inflation and the yellow metal is attracting demand as a safe-haven.

Prices are mainly taking cues from the economic development and the Euro zone debt issue continues to haunt sentiments in the markets. Even though Greece receives a bailout, markets are concerned further over the other Euro zone countries like Spain, Portugal, Italy and Ireland which stand next in line with their debt woes. These worries have led to major pressure on the Euro which slumped sharply in the last week. Weakness in the Euro has revived demand for the low-yielding dollar.

We expect the US dollar to strengthen in this week as evidence of global economic recovery and a surge in the US housing market will boost expectations of a rate hike. Other than that,concerns over debt issues in the Euro zone will continue to provide support to the dollar as a safe-haven during financial uncertainty. In the last week the euro touched the weakest level against the dollar before Greece asked the EU and the IMF to activate a bailout of as much as 45 billion euros.

US Economic Update

Data from the US housing market front has been positive in the last week. New home sales in the US rose 27% in March, the highest gain since April 1963. US durable goods orders gained 2.8%, giving indications of an improving economic scenario in the world's largest economy. Unemployment claims in the US declined 24,000 to 456,000 in the week ended 17th April. This indicates that companies are now enjoying better sales and profits and are thus gaining confidence in the economy and staff retaining.

In the last week, Federal Reserve Chairman gave his speech on the US labour market saying that growth in the labour market could be slow as the number of jobs lost since the recession in December 2007 was high. But a significant amount of time will be required to restore the 8.5 million jobs that were lost during the past two years. A gradual pick up in jobs will also help to list consumer spending. The statement by the Fed Chairman indicates that slow recovery on the labour market front will dent hopes of an immediate interest rate hike by the US. Despite lower expectation of a rise in interest rates, we expect the dollar to strengthen as worries in the Euro zone could boost demand for the low-yielding currency.

Another important development in the US last week was the speech by President Barack Obama. He emphasized on the need for financial regulatory reform and modernization. New reforms may help to bring certainty in the capital and credit markets and fuel the economy by creating jobs.

Fundamental Outlook

Despite positive economic data, markets remain concerned over issues like debt-woes in the Euro zone. Debt issues in Spain, Portugal and Italy remain unresolved and this continues to haunt market sentiments. Hence, this uncertainty in the markets could lead to strength in the dollar which will lead to downside pressure on prices of dollar-denominated commodities. Commodities will take direction from movement in the dollar, economic data and corporate earnings results. On one hand, markets are witnessing positive economic data and corporate earnings results which give hope of economic recovery. But on the other hand, markets remain susceptible over debt issues in the Euro zone.

Currency Crisis in PIGS - Portugal, Ireland, Greece, Spain

The last few months have witnessed major turmoil as economic issues came up in Greece. Sovereign debt defaults by the EU member countries reduced the appeal of the 16-nation currency i.e. Euro. The currency has slipped more than 5% in this year and markets perceive a further drop in the currency as despite the bailout package offered to Greece by the EU and IMF, other EU members like Portugal, Ireland, Italy and Spain face a similar situation. In this year, the Euro got affected as concerns over the ability of Greece to tackle its deficit led to concerns of sovereign default by the country, reducing faith in the 16-nation common currency. This indicates that the country has been hit hard by a severe downturn and it may take years to solve the sovereign debt issue. On the backdrop of this crisis, markets have become very volatile and investors are now flocking to the US dollar as a safe-haven investment. The EU and the European Central Bank (ECB) is finding ways to deal with this issue.

Greece's budget deficit equals to 12.7% of the Gross Domestic Product (GDP). As per the EU criteria nations must have a budget deficit not exceeding 3%. Rising budget deficits in other EU member countries has raised further concern and dented the outlook for the Euro. This debt crisis could have a widespread effect and impact the other 16-member nations too. The EU is now supporting Greece with a bailout package along with the IMF. After the EU agreed to rescue Greece, market sentiments improved. The EU has decided that it would try rescuing Greece from sovereign default with the help of IMF. However, after Greece, countries like Spain and Portugal face severe deficit issues and this could again trigger concerns in the coming days. This could further revive safe-haven demand for the dollar.

The EU and IMF have announced details of the 45 billion euro financial aid package for Greece. The EU will offer Greece 30 billion Euros in three-year loans in 2010 at 5%. Another 15 billion Euros will be given by the IMF. Another factor that has affected the appeal of the euro is that Fitch has cut its ratings for Greece to BBB- giving it a lowest investment grade, with a negative outlook. This move is surely affecting the economic status of the Euro zone which is currently under pressure to save its economy from further hurdles.

The Greece government faces more than 20 billion Euros in debt redemptions in April and May alone this year. An equal amount would be required toward the end of the year for interest payments and honouring debt-obligations. Last week the government increased its 2009 budget shortfall to 12.9 as against the previous forecast of 12.7 percent. Greece's fiscal deficit is highest in the history of the euro zone since the inception of the common currency in the year 1999.
The country has no ray of hope and has finally advocated strong austerity measures to cut the nations highest deficit. These include lower infrastructural spending, salary cuts for public workers, higher taxes, increase in the retirement ages, etc. These measures are constantly facing opposition from the general public. The austerity measures are also affecting the political scenario as what happens on the government front finally affects the economic scenario. Policies laid by the government become crucial given the current debt laden scenario of a large number of EU members.

The fate of the Euro….

A major question that is worrying the markets is the fate of the Euro amid the debt crisis. Its fate lies on the economic status and scenario in the Euro zone. Since the Euro zone is a set up of 16-member nations which have different economic status, it makes it very difficult for the euro to sustain. Currently, countries like Spain, Portugal, Ireland and Greece are facing a tough time as they debt woes are rising. If the euro zone is unable to tackle this without taking IMF aid further for the other countries then rating will deteriorate and lead to downside pressure on the euro. Amid all this economic uncertainty in the euro zone, the dollar could gain strength as the markets perceive the dollar as a safe-haven amid economic turmoil. Going forward we expect worries in the euro zone to rise as other countries debt woes have to be dealt with. In this scenario we expect the euro to weaken against the dollar. From a long-term perspective too we feel that the global economy is recovering but in this process the euro zone is still dealing with its crisis. If economic data from the US comes on the positive side then we could witness further pressure on the euro. The currency represents the 16- member euro zone and current economic troubles in not one but five member nations is a cause of concern.

www.angelcommodities.com

Commodity Center---April 12, 2010

Copper prices rise skyward on Greece rescue package

Copper prices have rallied in the last few days, with prices touching a high of $8010 on the LME and Rs359 on the MCX. This rise in prices has been backed by declining inventories and positive economic data from the US. Even though economic issues in the Eurozone persist, positive economic updates from the US is providing support in the form of improving demand prospects from the world's largest economy. The red metal prices have rallied despite dollar strength as better economic prospects have offset the effect of dollar strength. Demand in Asia, outside China is also strong, especially Japan, Korea, Taiwan and the Middle East.

Strong fundamentals in the case of copper justify the rise in prices. Robust demand from China has been the catalyst to rising prices. Though factors like fund buying and declining inventories has helped the red metal to rise, Chinese demand has also played a major role. In 2010, copper demand in China is expected to grow between 8-10% as compared to 2009 and may exceed the 6 million tonne mark. Though China's demand may be slowing from a very high growth rate of 12% in 2009 a rise in demand by 7% would still be bullish for the copper market. In 2009, China consumed 5.7 million tonnes of copper and world consumption in the last year stood around 18 million tonnes.

Economic developments of the last week

Unemployment claims in the US increased by 18,000 to 460,000 in the week ended 3rd April as more Americans filed initial claims for jobless benefits last week. The week leading up to Easter and the two following that are usually considered volatile for unemployment claims.

FOMC Meeting Minutes indicated that recent data pointed to a noticeable pickup in the pace of  consumer spending during the first quarter, but participants agreed that household spending going forward was likely to remain constrained by weak labor market conditions, lower housing wealth, tight credit, and modest income growth. Fed officials are looking for signs of self-sustaining growth before they begin their exit from the most aggressive monetary policy in U.S. history. Comments by the Federal Reserve Chairman were not very positive as he said that the US economic rebound had yet to produce a significant recovery in jobs. Eurozone GDP for the fourth quarter slipped to 0.0% from 0.4% in the third-quarter of 2009. Unemployment in the Eurozone remained at an 11-year high and this too is a major concern for the economy. However, some economic data has come as relief to the markets as economic confidence improved in March 2010 and manufacturing growth accelerated to the fastest pace since August 2007.

The ECB President said that Greece was not in danger of defaulting its debt and this provided some ray of hope to the dwindling currency. Greece's first-quarter budget deficit fell 40% and narrowed to 4.3 billion euro from 7.1 billion euro in the same period a year earlier.

Factors that will contribute to upside in copper prices from the short-term perspective:

·         Restocking of copper

·         Demand from China

·         Supply uncertainty is expected to continue underpinning prices

·         Improving economic scenario in the US, the world's largest economy

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Short-term fundamental outlook

We expect copper prices to trade with an upside bias as improvement in demand coupled with positive economic data will boost prices. But $8000/tonne level on the LME is very crucial and prices will sustain as demand growth from China and the rest of Asia boosts further.

Currency Futures Market - It's Dynamics

In order to trade on the currency market platform, an investor must understand the factors that affect the currency price movement. In addition to that, it is also important to understand the fundamental factors that drive movement in the currencies. On the Indian currencies market platform the following pairs are traded - USD-INR, EURO - INR, JPY - INR and GBP-INR. Taking the first step forward, let us understand the fundamental factors that affect Rupee.

The main factor that affects the USD INR or any other currency is the demand/supply dynamics for the individual currencies. However, the demand/supply dynamics is influenced by many other factors such as interest rates, inflation, money supply, trade balance, growth in imports, exports, capital flows, overall economic growth in the country and global developments. For example, whenever the country's exports are greater than the imports, there is a huge capital inflows of the foreign currency through payments received whereas vice versa when the imports exceed the exports there is huge capital outflow from the country. In other words, rising exports increase supply of foreign currency whereas rising imports increase demand for foreign currency. However, apart from these basic demand-supply fundamentals, factors like view of market participants and expectations of growth in the country also affect the currency's demand/supply dynamics.

Who can benefit from trading in currency futures?

Both importer and the exporter can benefit from currency futures. In case of an importer, when he is entitled to make payments and if the domestic currency depreciates, then he may have to pay more amount of domestic currency to make the same payment, eventually making a loss. On the other hand an exporter will receive lesser amount if the home currency appreciates. The main objective of initiating currency forwards on the OTC market was enabling risk management (largely offloading or transforming existing currency risk of a customer). However, it is also used as an alternative investment within prescribed limits. Currency futures can be an added advantage in your investment portfolio.

What are the benefits of exchange-traded currency futures as compared to OTC Currency forward contracts in India?

·         Futures contract follow the principle of universal pricing- "One Price for All". The futures contracts are not customized like forward contracts.

·         Futures have smaller contract sizes as compared to forwards with a minimum lot of USD 1000. This enables even the small and medium enterprises to hedge their currency risks.

·         Standardized exchanges provide online trading platform, thereby enabling remote access to participants.

·         Price discovery mechanism is completely transparent. Prices are derived mainly through the demand/supply behavior of participants.

·         Settlements in futures are done through the clearing house of respective exchanges. Hence the risk of counterparty defaulting is eliminated.

Who can benefit by trading in currency futures?

Hedgers: Importers, exporters, corporate, SME's and banks can hedge on MCX-SX to mitigate their forex risk at relatively low entry and exit costs.

Traders:  Traders interested in taking short term risks for earning returns on a short term basis participate in currency trading. The traders provide liquidity in the market, thereby, enabling hedgers to efficiently transfer risk.

Arbitragers: Arbitrage in simple terms means purchasing in one market where the price is low and at the same time selling it in the other, thus taking advantage of the temporary price differential which exists between the two markets. Traders continuously wait for such differentials and try to earn some profits out of it. Arbitrage can be possible in the same market but within different contracts.