Commodities | May 30 2006
By Greg Peel
Is it over now? That’s the lingering fear in commodities and stock markets as the recent bounce back would appear to have restored some order in the market. The great thing about corrections is that it shakes out Johnny Come Lately mad speculators who should never have gone near the market in the first place. And the quicker the "bubble" is deflated the more confident legitimate investors can be.
As far as corrections go, it was pretty tame. Bubble’s always burst when one little surprise comes out of left field, and in this case it was a higher than expected US CPI figure. The weight of correction expectation itself did the rest. But when you consider that the likes of copper and zinc have risen over 80% this year alone, then ultimate pullbacks of 6% and 11% from the highs is nothing to write home about.
Danske Bank analysts note that in actual fact commodity stock investors have not been particularly hard hit, as one might surmise. The biggest hits (globally) were actually in commodity-related stocks, ie the mining and construction service companies and peripherals that have been sucked along in the mining boom wake. While not having risen quite as hard as commodity companies themselves, commodity-related companies have suffered a lot worse in the sell-off.
What this is saying to the Danske analysts is that it is the sudden increase in risk aversion in the market that is affecting these commodity lesser-lights, while contrasting its belief in the prevailing "stronger-for-longer" commodity theme.
Danske believes the fairly modest fall in commodity prices underlines that commodities remain solid. The downside for the oil price, for example, appears limited, with OPEC enjoying higher prices and Iran still stirring the cauldron. Danske believes WTI will remain above US$70/bbl this year.
And then whichever way you look at it, metals inventories are very low and Chinese demand shows no sign of abating.
Commodity prices will remain volatile for the moment as speculators will see a bogey man under every bed, and panic each time some adverse news is reported. However the latest inflation numbers in the US have looked more positive, which may have ended that little phase for now.
What will be worth keeping an eye on is how the collapse in confidence pans out. Risk aversion numbers have skyrocketed since about March this year, when the first real correction stories started appearing. This would suggest a shift away from the euphoric "get me in" mentality of earlier in the year to a more sober appreciation of realities, albeit still on the bullish side.
The extraordinary gains may have gone, but the market should return to a positive stance after this minor correction. It just won’t be quite as manic. That isn’t to say there’s not something else lurking ready to jump out and scare everyone into selling once more.