 "If Fed has made a mistake, markets could be extremely volatile: Nic Brown")
Federal Reserve has surprised market participants across the globe by postponing the tapering of its bond buying programme. This has resulted in a spurt in commodities’ prices. Rajesh Bhayani spoke to Nic Brown, Head of Commodities Research with the London-based Natixis to understand whether the rally seen is sustainable. Excerpts:
US Fed decision has resulted in a rise in precious metals prices. Will the rise sustain? Your outlook.
The Fed decision came as a huge surprise to the market. Both the sharp fall in bond yields and abrupt decline in the dollar are unequivocally good news for precious metal markets. Whether this is a short term bounce or a reversal of trend may depend on the reason why Bernanke changed his mind. If the US economy is weaker than the market thought, then both yields and the dollar will fall further, and gold prices can push higher. If an increasingly bi-polar Congress is about to repeat all the mistakes it made in Summer 2011 in terms of the budget and debt ceiling, then again, gold prices can push higher. If the Fed has just made a huge mistake and the US economy is actually strengthening, then markets could be extremely volatile in the weeks ahead.
There will be some short-covering going on in the gold market today. Sentiment is important, but with yields falling and the dollar weakening, there are solid fundamental reasons for higher gold prices.
Do you see more upside left in Brent crude oil?
Oil prices can benefit from dollar weakness and extended Fed stimulus, but near $111/bbl, Brent prices probably don't have too much upside from here.
Base metals have been in an oversupply zone. Will the Fed’s decision help in improving the scene for base metals?
Given the strength of the US economy (something Bernanke is clearly keen to maintain), and the gradual improvement in the outlook for Chinese growth, we are cautiously positive on base metals. Yes, many of these metals are currently in excess supply (in particular nickel and aluminium), but the improvement in global economic conditions should clearly be supportive for base metal demand. We continue to like copper and lead, while the medium-term outlook for zinc is also improving.
Will Chinese demand for commodities revive now?
Yes. We have been of the opinion that Chinese economic activity would strengthen as the year progressed, and recent economic indicators certainly back up this point of view. Industrial production was +10.4% yoy in August. Electricity consumption +14% yoy in August. The Baltic Cape-size index (basically the transportation cost for shipping iron ore and coking coal to China) is up sharply since the beginning of the month.
One small note of caution on China is the government's growing focus on curbing overcapacity. This is likely to have a dampening effect on activity in heavy industries such as steel, aluminium, cement and shipbuilding, but equally it is hard to see these policies being possible unless the Chinese (and world) economy is growing at a healthy pace in the first place.
US Fed decision has resulted in a rise in precious metals prices. Will the rise sustain? Your outlook.
The Fed decision came as a huge surprise to the market. Both the sharp fall in bond yields and abrupt decline in the dollar are unequivocally good news for precious metal markets. Whether this is a short term bounce or a reversal of trend may depend on the reason why Bernanke changed his mind. If the US economy is weaker than the market thought, then both yields and the dollar will fall further, and gold prices can push higher. If an increasingly bi-polar Congress is about to repeat all the mistakes it made in Summer 2011 in terms of the budget and debt ceiling, then again, gold prices can push higher. If the Fed has just made a huge mistake and the US economy is actually strengthening, then markets could be extremely volatile in the weeks ahead.
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Is the rally in gold sentiment driven or are investors coming back?
There will be some short-covering going on in the gold market today. Sentiment is important, but with yields falling and the dollar weakening, there are solid fundamental reasons for higher gold prices.
Do you see more upside left in Brent crude oil?
Oil prices can benefit from dollar weakness and extended Fed stimulus, but near $111/bbl, Brent prices probably don't have too much upside from here.
Base metals have been in an oversupply zone. Will the Fed’s decision help in improving the scene for base metals?
Given the strength of the US economy (something Bernanke is clearly keen to maintain), and the gradual improvement in the outlook for Chinese growth, we are cautiously positive on base metals. Yes, many of these metals are currently in excess supply (in particular nickel and aluminium), but the improvement in global economic conditions should clearly be supportive for base metal demand. We continue to like copper and lead, while the medium-term outlook for zinc is also improving.
Will Chinese demand for commodities revive now?
Yes. We have been of the opinion that Chinese economic activity would strengthen as the year progressed, and recent economic indicators certainly back up this point of view. Industrial production was +10.4% yoy in August. Electricity consumption +14% yoy in August. The Baltic Cape-size index (basically the transportation cost for shipping iron ore and coking coal to China) is up sharply since the beginning of the month.
One small note of caution on China is the government's growing focus on curbing overcapacity. This is likely to have a dampening effect on activity in heavy industries such as steel, aluminium, cement and shipbuilding, but equally it is hard to see these policies being possible unless the Chinese (and world) economy is growing at a healthy pace in the first place.