Commodities Surge to Three Week High on Europe’s Improved Outlook

on Jun 30, 2012
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On Friday (June 29) commodities advanced to their highest level in three weeks. The surge was triggered earlier in the day when European leaders defied market expectations and reached a breakthrough in resolving the Eurozone debt crisis. After a 13-hour EU meeting, the bloc’s chiefs made an agreement to allow funds allocated to bailing out indebted governments to be used to directly bail out struggling banks as well. The move is expected to provide relief for Spain and Italy in particular as their borrowing costs have continued to rise rapidly.

Meanwhile in China, the monetary policy advisory committee of the People’s Bank of China stated this week that Beijing will use various policy tools to ensure a steady flow of capital that will keep the country’s economic engine humming and in a targeted range. China’s policy aimed at ensuring steady credit and money supply has also driven bullish momentum. What is more, backed by recent strong economic data from the U.S., including durable goods demand beating analysts’ expectations and a 7.6 per cent rise in single family home sales, many investors are hopeful that energy and base metal demand will continue trending upward.

!m[](/uploads/story/155/thumbs/pic1_inline.png)Commodities such as oil are particularly well positioned to benefit from the progress made at the European Union summit, because of the better prospects for energy demand growth and because of the jump in the value of the euro relative to the dollar. Oil is priced in dollars and becomes more costly for consumers in other currencies when dollar values strengthen. Accordingly, buoyed by Europe’s improved outlook and the renewed anxiety over Iran, crude-oil futures edged up more than 9 per cent, outperforming other leading commodities and overlooking the latest bearish news of weak consumer sentiment. Nymex crude-oil futures settled at $84.96 a barrel, a rise of about 9.4 per cent, the biggest one-day oil rise in terms of percentages since March 2009 and one of the biggest single-day increases since Nymex crude oil began trading in 1983.

At the same time the Standard & Poor’s GSCI Spot Index (MXWD) of 24 raw materials rose 1.8 per, which is the biggest gain since June 6. The increase in the commodities gauge reduced its quarterly loss to 16 per cent, still the worst since the final quarter of 2008, when the commodities gauge jumped 44 per cent following the bursting of the U.S. real-estate bubble and collapse of Lehman Brothers Holdings Inc. pitched the world into a recession.

But despite the overall positive movement of the global financial market and the industrial commodities gains, some analysts remain wary. “We expect increasing risks in the global economy in the second half,” said Lynette Tan, an analyst at Singapore-based Phillip Futures Pte Ltd. “The U.S. and China are still not doing well and the debt problems in Europe look set to worsen.”

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