Views on commodities and energy
Interesting take on the rise in commodity prices from Julian Jessop, chief international economist at Capital Economics. The rise has little to do with the weaker dollar and everything to do with expectations of global economic recovery, he says.
The broad-based revival in commodity prices since March clearly reflects a combination of factors. One of these is the pure accounting effect of the depreciation of the dollar. Other things being equal, a fall in the U.S. currency will of course put upward pressure on commodity prices when measured in dollar terms - commodity producers with bills to pay in other currencies such as euros and pounds will require a higher price in dollars, while consumers outside the dollar bloc will be more able to pay that higher price. However, the movements in currencies have generally been small compared to the underlying movements in commodity prices.
Looking closely at the relative performance of different commodities, Jessop reckons the rally has primarily been led by oil and industrial metals, which are the most sensitive to the economic cycle. Inflation-driven commodities such as precious metals, including gold, have underperformed in the rally, he says.
Jessop takes all this to mean that higher commodity prices are just another manifestation of the growth in confidence about the global economic outlook. However, echoing investors who increasingly want to see concrete evidence, he warns that the anticipated pick-up in growth-based demand has yet to actually materialise.
Oil prices have been trading in an unusually strong positive correlation with equities markets over the past few months on hopes that signs of an economic recovery could mean a boost for energy demand.
But with oil and product inventories swelling and little sign of demand improving in the United States and other big developed economies, analysts warn that the linkage may be hard to maintain, especially if U.S. motorists cut back on vacations this summer.
One of the most significant comments about the world economy this week may have come from Klaus Kleinfeld, the chief executive officier and president of Alcoa, America's largest aluminium producer. Amid the reporting of pretty horrible earnings -- a $497 million net loss versus a year-earlier gain of $303 million -- Kleinfeld said things may not get much worse.
"There are some signs in many of our end industries for a bottoming out," he said.