Emma Pinnock, energy analyst, Inenco
Ultimately the oil price increases that we saw of almost 12% since the beginning of 2011, due to both instability in the Middle East, the Japanese earthquake and the nuclear crisis, were not sustainable. We will see now oil prices realign with supply and demand.Simon Ward, chief economist, Henderson
The market will be moving into a period of correction as the poor economic data released from the US and Europe has confirmed fears that the recent high commodity prices could affect global demand. Interestingly, oil prices have fallen almost as quickly as they rose at the start of 2011 and we are seeing the impact of this feed through to the wholesale gas and power markets.
My blogpost in March suggested that commodity markets would cool as emerging-world growth slowed in response to monetary tightening. Industrial commodity prices remain closely correlated with E7 industrial output.Simon Smith, chief economist, FXPro
The timing of the correction, however, seems partly to reflect central bank liquidity operations. My post last week noted that G7 bank reserves were no longer rising, with the Fed temporarily sterilising its QE2 purchases (by requesting that the Treasury hold more cash in its Fed account) and the Bank of Japan allowing the post-earthquake liquidity boost to unwind. These trends are confirmed by the latest data.
Commodity bears may need to exercise caution near-term since QE2 has yet to complete and the Fed could choose to "unsterilise" its recent purchases if weakness extends to equities and credit markets, resulting in a growth-threatening tightening of financial conditions. For the moment, however, events are probably playing out to the Fed's satisfaction. Inducing a correction in commodities, indeed, may have been an intention of chairman Bernanke's refusal to entertain QE3 speculation at last week's press conference – consistent with the recent cessation of liquidity injections.
The rush for the exits over the past 24 hours has been concentrated in the commodity space, but naturally the implications have been felt across FX markets also. But it's not your classic "risk-off" move that we are seeing, which in itself is telling about underlying sentiment.However the parallels with 2010 are also uncanny. The year started with a sense of optimism and the main debate was the extent to which the Fed would unwind its ultra-accommodative policy by year end. The reality proved to be somewhat different. This year, expectations of policy tightening in the UK, combined with the end of QE2 and renewed talk of an exit strategy from the Fed, were the dominant themes of Q1 and are now petering out rapidly in Q2. For developed economies, the hope has been based on the premise that, with the worst now over, the good times should be around the corner. In reality, the healing process can be counted more in years than months. Markets sometimes forget this, but yesterday the fog of euphoria lifted. For the latest updates PRESS CTR + D or visit Stock Market news Today
Firstly, on the general commodity sell-off, the scrambling around we are seeing to explain the move is a classic case of looking for a trigger that's not there. People still debate the cause of most major market crashes, including 1929, 1987 and 2000. In terms of valuations, it's easy to put the case that things had gone too far, especially in the case of silver, which was on course for annualised gains of 380% this year if the pace seen January to April was to continue unabated. Thursday's economic data, while weaker (German factory orders, US claims), was not sufficient reason for investors to rush for the exits, especially with several distortions acting on the claims data. The main reason for the sell-off is that in the commodity space, many markets were running on the Chuck Prince (former head of Citi) strategy: "As long as the music is playing, you've got to get up and dance". Trouble is that on Thursday (for whatever reason), the music stopped playing and there was only one exit.
For FX, the pattern of the last 24 hours is very telling. Normally, one would expect the Aussie [Australian dollar] to be smacked on a commodity sell-off, but the main pain has been felt in markets less relevant to this currency, such as oil and silver. Furthermore, the RBA [Reserve Bank of Australia] offered hints overnight that further rate increases are likely on the way. At the other end of the spectrum, the euro took most of the pain, in part on the fact that longs were likely liquidated to pay for losses and margin calls elsewhere, together with Trichet's lack of hawkish undertones at his post-meeting press conference. This tells us that FX markets are trading less as risk assets, as was the case for much of last year (and most of '09), more based on relative fundamentals in the post credit crunch world.
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