High Commodities Prices
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Trading Features / Strategies from Simon Denham of Capital Spreads.
Markets were in a bearish mood last night as the price of commodities surges virtually across the board from metals to energy and softs. Looking at the data this morning the only sector that seems not to have moved strongly higher is the various meat products (Lean Hogs, Live Cattle) on the Chicago exchanges.
Whilst the world has concentrated on the price of Gold and Oil, the other commodities have been just as extraordinary. Renewables (such as corn, oats etc) are some 40% higher than last summer and others like Natural Gas and Heating Oil are 20 to 25pc up on last month. But the real zinger has been the price of platinum which has managed to move from $1,550 in late January to a closing price of $2,145 last night.
In the past I have been sanguine about structural inflationary pressure within the UK economy as it has seemed to me that much of the strain has been imposed by products beyond the control of the BOE rate control policies. The price of Oil and Corn could not give a monkey’s about what the interest rate is in little old England. This argument still holds good to a certain extent but the recent moves in worldwide commodities mean that producers will be forced, yet again, to either raise prices or squeeze margins. In the booming economies of China, India and Australia the pressure will be taken up by inflationary price hikes. However with the ‘old’ economies, which are weighed down with debt or slow growth (or a combination of both), it is more likely to be margins that take the hit. Not a good prospect for the Stock Markets.
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In the UK this will be felt across the board as tax revenues may fall substantially causing both the pound to weaken and the yield on Gilts to rise as the Treasury is forced to go to the markets for ever more funding to plug the PSBR hole.
That brings us neatly on to today with the release of January’s Net Borrowing number at 09.30. Analysts are expecting £9.5bn for the month which, if correct, will have a few longer term number crunchers wincing. Actual Money Supply, running at over 12pc for several years, may actually be on the way down which sounds good until you realise that much of the momentum in the economy is built around the consequences of this number. If this figure starts to contract sharply then Treasury models will be blown out of the water and the PSBR could widen dramatically in very short order.
The raft of numbers due out today should keep us on our toes for the trading session as Government finances come under the spotlight in the UK and the CPI and housing sentiment gets another going over in the US.
For all the woes of the Sub Prime sector over in the States the actual price of middle to high value real estate has not yet been greatly affected (falling perhaps 5pc). However, if the continued weakness in sales continues, this could well become a disaster waiting to happen. The glut of unsold homes is reaching biblical proportions and house builders (small ones who we don’t hear much of over here) are going under almost daily.
The above comments do not constitute investment advice and neither Capital Spreads nor Clean Financial accept any responsibility for any use that may be made of them.
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Risk Warning: Spread betting carries a high level of risk to your capital. You may lose more than your initial investment. It may not be suitable for all investors. Only speculate with money that you can afford to lose. Please ensure you fully understand the risks involved and seek independent financial advice where necessary.
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'High Commodities Prices' edited by SD, updated 21-Feb-08
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