Dollar power from Freddie/Fannie bad for commods
Investors, ready to hammer commodities down after driving them to record highs just months ago, may find more inspiration for their pessimism after the bailout of US mortgage giants Fannie Mae and Freddie Mac. The government seizure of the two...
Investors, ready to hammer commodities down after driving them to record highs just months ago, may find more inspiration for their pessimism after the bailout of US mortgage giants Fannie Mae and Freddie Mac.
The government seizure of the two lenders, announced over the weekend, sent the dollar and equities - the two assets that usually do well at the expense of commodities - soaring on Monday.
Analysts said the slump in oil and metals prices over the last six weeks due to softening demand for raw materials may intensify if the bailout of Fannie and Freddie gives investors more confidence in the US currency and stock markets. The dollar hit a one-year peak against other major currencies on Monday, extinguishing a run-up in oil prices trying to make a comeback on fears of possible hurricane damage to US energy facilities in the Gulf of Mexico.
Gold and copper prices ended down after initially following oil higher.
"One scenario we could have from here is an even stronger dollar and that means even more bad news for commodities,"
said Adam Sarhan, founder of New York's GlobalMacroResearch.com.
A strong dollar weakens prices of greenback-denominated commodities as it hits the purchasing power of buyers holding other currencies.
Until mid-July, the dollar was at record lows against the euro, making commodities a natural hedge against inflation for those holding the US currency. One of the most popular trades earlier this year was to go long - or bullish - on oil and keep a short - or bearish - position on the dollar.
A near freefall in equity prices and relatively tame US Treasuries earlier this year also helped push oil, metals and grains prices to record highs, resulting in commodities outperforming stocks and bonds for four straight quarters.
But with the rescue of Fannie and Freddie propping up the dollar and stocks, analysts forecast more gloom for prices of oil, which have been pressuring other commodities down the last six weeks in the same way it pushed them up during the first seven months of the year.
"We suspect that fund money may leave commodities over the next day or two, especially in light of the stronger equity markets," said Edward Meir, a commentator on energy and metals at MF Global, the world's largest broker in commodity futures.
"In addition, with the dollar pushing higher, there will be further pressure on metals as well," Mr Meir said.
Benchmark gold futures in New York closed just below $803 an ounce on Monday, down from above $1,000 an ounce in mid-March. US copper futures ended below $3.10 a pound, against a record high above $4 in early July.
Crude oil on the New York Mercantile Exchange settled up 11 cents at $106.34 a barrel, far below the record high of $147.27 on July 11.
"For what it's worth, our expect-ations are $90 to $95 on oil," said Dan Rice, a portfolio manager at US investment manager BlackRock, which has some $1.4 trillion of assets under management.
But some analysts also said that barring what happened in equities, the dollar may lose some of its momentum after markets realise that the Freddie/Fannie bailout will not really solve the US housing and credit market woes.
In such a situation, commodity prices may see some support, particularly if more storm fears, such as Hurricane Ike, hit home.
"We are in the midst of the strongest hurricane season in three years. How many more bullets can the bears dodge without getting so much as a scratch? One of these days they are going to catch one right between the eyes," said Stephen Schork, editor of The Schork Report, an energy newsletter.
The government seizure of the two lenders, announced over the weekend, sent the dollar and equities - the two assets that usually do well at the expense of commodities - soaring on Monday.
Analysts said the slump in oil and metals prices over the last six weeks due to softening demand for raw materials may intensify if the bailout of Fannie and Freddie gives investors more confidence in the US currency and stock markets. The dollar hit a one-year peak against other major currencies on Monday, extinguishing a run-up in oil prices trying to make a comeback on fears of possible hurricane damage to US energy facilities in the Gulf of Mexico.
Gold and copper prices ended down after initially following oil higher.
"One scenario we could have from here is an even stronger dollar and that means even more bad news for commodities,"
said Adam Sarhan, founder of New York's GlobalMacroResearch.com.
A strong dollar weakens prices of greenback-denominated commodities as it hits the purchasing power of buyers holding other currencies.
Until mid-July, the dollar was at record lows against the euro, making commodities a natural hedge against inflation for those holding the US currency. One of the most popular trades earlier this year was to go long - or bullish - on oil and keep a short - or bearish - position on the dollar.
A near freefall in equity prices and relatively tame US Treasuries earlier this year also helped push oil, metals and grains prices to record highs, resulting in commodities outperforming stocks and bonds for four straight quarters.
But with the rescue of Fannie and Freddie propping up the dollar and stocks, analysts forecast more gloom for prices of oil, which have been pressuring other commodities down the last six weeks in the same way it pushed them up during the first seven months of the year.
"We suspect that fund money may leave commodities over the next day or two, especially in light of the stronger equity markets," said Edward Meir, a commentator on energy and metals at MF Global, the world's largest broker in commodity futures.
"In addition, with the dollar pushing higher, there will be further pressure on metals as well," Mr Meir said.
Benchmark gold futures in New York closed just below $803 an ounce on Monday, down from above $1,000 an ounce in mid-March. US copper futures ended below $3.10 a pound, against a record high above $4 in early July.
Crude oil on the New York Mercantile Exchange settled up 11 cents at $106.34 a barrel, far below the record high of $147.27 on July 11.
"For what it's worth, our expect-ations are $90 to $95 on oil," said Dan Rice, a portfolio manager at US investment manager BlackRock, which has some $1.4 trillion of assets under management.
But some analysts also said that barring what happened in equities, the dollar may lose some of its momentum after markets realise that the Freddie/Fannie bailout will not really solve the US housing and credit market woes.
In such a situation, commodity prices may see some support, particularly if more storm fears, such as Hurricane Ike, hit home.
"We are in the midst of the strongest hurricane season in three years. How many more bullets can the bears dodge without getting so much as a scratch? One of these days they are going to catch one right between the eyes," said Stephen Schork, editor of The Schork Report, an energy newsletter.