FYI | May 10 2007
By Greg Peel
Alright we admit it – it probably wasn’t just the FNArena BHP/Rio takeover article published on Tuesday that sent Rio shares flying close to $100 yesterday. That article was a summary of the excellent and extensive work carried out by resource analysis teams at Merrill Lynch and Citi and published over the past few days.
Talk of such a takeover is not exactly new news, but as the ABC’s Alan Kohler cheekily suggested in his market wrap last night, it appears to have turned into Chinese whispers over lunch yesterday at any number of east coast CBD establishments.
Rio has denied any approach by BHP, but that didn’t stop markets from equities to gold taking notice of the “rumour” overnight.
The Dow managed another 54 point rally into uncharted waters, largely as a result of the Fed leaving rates unchanged at 5.25%. Nobody really expected it to do anything else, however. But M&A moves were again a feature, with the aforementioned rumour adding fuel to the fire.
The RBA’s Glenn Stevens could have written the Fed’s accompanying statement, containing as it did almost identical views as the RBA’s recent update. The Fed suggested that core inflation remains "somewhat elevated" and "although inflation pressures seem likely to moderate over time, the high level of resource utilization has the potential to sustain those pressures."
Mind you, it’s pretty much what the Fed said last month as well. The Fed’s problem is that it basically has to let one element give – either the US economy or the US dollar. It seems at present it is the greenback being sacrificed.
That should be good news for gold, but once again, like a broken record, gold has failed above US$690/oz. The US dollar managed to stage a rally last night, however, which was assumed short covering post the Fed’s ongoing inflation stance.
News wires have blamed an overnight fall in the oil price as the reason for a slip last night below US$680/oz. This is largely rubbish, as the gold price has paid little attention to the oil price over the last week or so. But then reporters have to find a reason somewhere.
They might have been better off with the old fall-back position of “more sellers than buyers”. The more cerebral Grandich Letter noted "Gold’s ability to march towards $700, albeit slower than some expected, is a testament to the physical demand in the face of heighten central bank selling and bears trying to cap the market." It looks like the bears are winning again – for the moment – and no doubt assumptions of clandestine bullion bank activity will be spreading across the market.
But the gold market did not escape without discussion of the Rio rumour, which only goes to show the gravity of such speculation given Rio is hardly a gold player.
Some sanity emerged in the new uranium futures market overnight, as the contract fell from highs yesterday of US$144/lb to settle at US$136.25/lb. There was a pick-up in open interest, but only to 37 contracts, rendering this market so far an absolute tiddler.
Nickel created new highs in London overnight, only to fall back heavily in New York. Aluminium and copper also posted losses, and given the euphoria of the past few days it would not be surprising to see a bit of a pullback in our beloved diversifieds today. But you never know. The SPI Overnight posted a 31 point gain. Trade in BHP and Rio offshore also caught up to yesterday’s developments.