The Overnight Report: Commodities Back In Favour

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This story features BHP GROUP LIMITED, and other companies.
For more info SHARE ANALYSIS: BHP
The company is included in ASX20, ASX50, ASX100, ASX200, ASX300 and ALL-ORDS

By Greg Peel

The Dow rose 2 points while the S&P rose 0.2% to 1118 and the Nasdaq gained 0.3%.

The US dollar index is calculated from a basket of currencies representing America's four largest trading partners (thus euro, yen, pound and Canadian dollar). The Chinese renminbi is not included as the renminbi is pegged to the dollar.

Last night the US dollar index did not fall markedly – it was down 0.25% to 80.52 over 24 hours – but to a great extent commodity markets responded as if it had. Gold jumped US$14.50 to US$11.32/oz. Copper and aluminium both rose 2%. Zinc rose 1% and nickel surged 4%. Oil also rose but again ran into a barrier at US$80, finishing up US98c at US$79.68/bbl.

Traders on the London Metals Exchange reported an apparent new wave of commodity fund allocations to metal investment for the new month. The move in copper was notable, given early in the session copper fell as news came through there was no apparent damage to Chilean copper mines or related facilities from the earthquake.

Supporting the US dollar index is ongoing weakness in the pound, reflecting fears the UK is heading towards a hung parliament in June. The euro was weak once more in the European session, as traders awaited the latest budget cut plans from Greece ordered by the EU. However, the euro rebounded strongly as the European time zone gave way to the US time zone, with traders Stateside feeling a lot more comfortable about a German-led state bank rescue package for Greek debt.

The US dollar was down slightly against the yen, but of the four index constituents the most notable last night was the Canadian dollar. Last night the Bank of Canada elected to leave its cash rate on hold at 0.25%, but in its accompanying statement the central bank provided a strong indication that the first post-GFC interest rise is just around the corner given inflation appears to be building.

And yesterday the Reserve Bank of Australia raised its cash rate to 4.00% to mark its fourth post-GFC increase. Futures markets are speculating there will be three to four further 25 basis point increases before the year is out. The Aussie is not part of the US dollar index, but is among the world's most traded currencies nevertheless. The Aussie is up another third of a cent to US$0.9033.

Last night Japanese financial group Nomura suggested annual contract prices for iron ore will rise 70% in 2010 and that iron ore and coking coal prices – the constituents of steelmaking – will double over the next two years. This is hardly a scoop, as Australian analysts from major houses have been quietly drawing the same conclusion for a few weeks now. Most analysts had earlier pencilled in 50% increases, but strong spot market trading has pushed those expectations up to 70% and possibly beyond. Given Japan always sets the first prices, the fact Japanese analysts are now tipping big price increases lends weight.

The ball is once more in the court of the iron ore producers, and not in the court of Chinese steelmakers as it was in 2009. Australian and Brazilian iron ore heavyweights have been trying to break the annual contract benchmark system for a while now, pointing to disparities with spot market activity which favours lesser suppliers such as India. With the power of Chinese demand behind them, BHP Billiton ((BHP)), Rio Tinto ((RIO)) and Brazil's Vale have indicated that this year's haggling begins at the current spot price.

Shares in global iron ore and coal stocks listed in New York rose steadily last night and the S&P materials sector index rose 1%.

The Dow was up 53 points at its peak last night until late selling in other sectors affected little change at the close. Wall Street is bracing itself for this week's unemployment numbers and taking profits on the Dow's return to positive territory for 2010, as it did briefly last night.

Takeover activity was in the news again last night as one US fertiliser company looked to acquire another. Qualcomm pleased the market by announcing a buyback and a regime change was noted in the US auto market. For the first time in a decade, Ford pipped General Motors in monthly vehicle sales, and topped the list as once mighty Toyota found its sales figures sticking in reverse.

The SPI Overnight gained 24 points or 0.5%, clearly buoyed by commodity strength.

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