Tuesday, April 12, 2011

Falling Commodities Spook Investors

Boy oh boy, ok no one is reading my blog to be surprised by this! So maybe there is not the demand that has previously been reported surprise surprise.

Aivars Lode

Falling Commodities Spook Investors
Watchers Wonder If Resources Are Now Too Expensive For Consumers to Keep Up; Stocks Tumble. Text By LIAM PLEVEN , JONATHAN CHENG and CAROLYN CUI
Global markets tumbled Tuesday, dragged down by rising concern that the high cost of raw materials is eating into tight business and household budgets and undercutting prospects for economic growth.

Crude oil fell 3.3%, leading a broad reversal of the rally that had recently sent prices for copper, cotton and other commodities to record highs.

Oil prices have now dropped 5.8% this week, after spiking in recent months amid Middle East unrest.

Associated Press

Oil futures fell 3.3%. Above, raders work the crude oil options pit at the New York Mercantile Exchange April 12.
.Oil's dip came after the International Energy Agency, which represents big oil-consuming nations, and the Organization of Petroleum Exporting Countries both reported that demand is weakening amid high prices. Saudi Arabia has cut back production after ratcheting it up just a few weeks ago amid fighting in Libya, another major exporter.

Crude oil on the New York Mercantile Exchange settled on Tuesday at $106.25 a barrel, though prices are still up 16% this year.

Stocks also dropped broadly. The Dow Jones Industrial Average fell 0.9%, its biggest daily drop in almost a month.

Renewed worries about contamination from Japan's damaged Fukushima Daiichi nuclear-power plant also weighed on stocks.

Tokyo's Nikkei stock average dropped 1.7%, Hong Kong's Hang Seng index lost 1.3%, and Germany's DAX declined 1.4%.

Surging prices for raw materials have been stoking rising fears of inflation in recent months.

But Tuesday's simultaneous drop in stocks, oil and other basic goods underscored another immediate threat: that commodities have become too costly for cash-strapped customers still contending with high unemployment.

Government data released Tuesday showing that U.S. exports fell in February for the first time since August contributed to the worries and led many forecasters to reduce their economic-growth projections.

""The potential for a slowdown in the global growth story has finally come to fruition," said Jay Wong, principal and equity portfolio manager at Payden & Rygel. "I'm not saying we're going to get a recession, but if you look at the range of growth estimates for the year, people are coming in more toward the bottom of the range. It looks like expectations are on the muted side."

Macroeconomic Advisers, a forecasting group, cut its projection for first-quarter gross-domestic-product growth from 2.1% to 1.5%, while Morgan Stanley analysts reduced their forecast from 1.9% to 1.5%. The government will release first-quarter GDP data April 28.

Jonathan Cheng explains why oil prices slid very sharply today back to $106 a barrel and stocks tumbled on concerns about Japan, energy and Alcoa.
.For investors still struggling to gauge how the devastating earthquake in Japan and the continuing Middle East turmoil may affect growth, the tepid trade data offered an early sign of the economy's persistent fragility.

The negative economic indicators, and words of caution from the IEA and OPEC, came as investors were already digesting the recent commodity rally and weighing whether to take profits.

Goldman Sachs Group Inc., a commodity bull among Wall Street banks, on Monday recommended that clients sell a basket of commodities that had risen sharply in recent months.

Prices for the handpicked basket, consisting of crude oil, copper, cotton, soybeans and platinum, had surged 25% on balance since Goldman recommended buying the commodities in December.

The basket hit Goldman's return target eight months earlier than expected.

."Even though we have not changed our fundamental views, prices have moved rapidly," David Greely, head of energy research at Goldman Sachs, said in an interview Tuesday.

Tuesday's reversal also hit a range of commodities beyond oil, as investors sold out of hard assets that have benefited for months from low interest rates and lingering fears of financial turmoil.

Copper prices dropped 1.7%, wheat plummeted 4.9%, cotton shed 2.4%, and gold prices dipped 1%.

"A lot of people are doing the exact same thing" as Goldman Sachs by concluding it is time to sell their own commodity basket, said Nicholas Johnson, co-manager of Pimco's CommodityRealReturn Strategy Fund.

Even with the declines, many raw materials still cost significantly more than they did as recently as year end. Corn, for instance, is up 20% this year.

"We are still very positive on many commodities on a fundamental basis over the long run," Goldman's Mr. Greely said.

In its monthly report, OPEC cut its world oil-demand-growth forecast for 2011 by 50,000 barrels a day, though it still forecasts world-wide demand to grow by 1.39 million barrels a day in 2011. OPEC said U.S. gasoline sales fell by almost 1.3% in January, as people drove less and bought more efficient cars to make up for higher fuel prices.

The IEA, meanwhile, on Tuesday kept its global oil-consumption estimates for 2011 unchanged but warned that "preliminary January and February data suggest that high prices are already starting to dent demand growth."

High oil prices may pose the greatest threat to global growth. U.S retail gasoline prices rose 11 cents last week, to $3.79 a gallon, inching close to the level of $4 a gallon economists say will lead to cutbacks in spending by consumers. Diesel fuel, a key transportation cost, already is more than $4 a gallon.

In the first quarter, average gasoline prices in the U.S. rose 20%, which translates into an additional expense of about $150 per household, or a total increase in gasoline expenditures of $17 billion during the quarter, the Federal Reserve Bank of Dallas said Friday.

Businesses paid an extra $1.2 billion a week on imported petroleum over the same period of 2010, the bank said.

—Jerry A. DiColo
contributed to this article.
Write to Jonathan Cheng at jonathan.cheng@wsj.com and Jerry DiColo at jerry.dicolo@dowjones.com

1 comment:

  1. I believe that inflation is going to have a major impact on the Global economy in the next decade. Companies like Google, Amazon, Apple and other players in the virtual space are going to do well and provide the life raft that will allow the economy in the US the navigate the inflation storm that is brewing in the horizon.