Markets, Resource News

BMO: Commodities Hit Three-Month High

Continued Firm Global Growth and Cheap Money Point to More Upside

Commodities ranging from aluminum to zinc rallied to the highest level in 12 weeks on Thursday amid increasing speculation that the global economy will continue to recover, lifting the demand for industrial metals, energy and others well into 2011. This is in sharp contrast to what was happening in commodity markets during May and June, when some investors were concerned that China would continue to apply the brakes to domestic demand and that the European sovereign debt crisis may precipitate another bank crisis, killing commodity demand growth for the foreseeable future.

Comex copper was up 1.2% at the time of writing (+3.7% w/w), LME aluminum was up 1.2% (+2.6% w/w), lead up 1.8% (+5.8% w/w) and LME zinc closed 2.5% higher (+3.6% w/w). Spot gold traded $8/oz higher to $1,168/oz (-2.3% w/w), while silver gained 0.9% (-2.8% w/w). Platinum traded up 1.3% (+2.2% w/w) and palladium up 3.3% (+7.5% w/w).The DJ global equity index traded flat (+1.8% w/w), while crude oil gained 1.6%, down 1.3% w/w, at US$78.20/bbl.

So what has changed since June? The answer: plenty. European governments and the ECB have provided up to a trillion dollars of cash and liquidity lines to countries most at risk of a sovereign debt default, giving these nations the needed “bridge financing” while they addressed their fiscal imbalance issues. Key European banks, with only a few mainly Spanish exceptions, have passed the stress tests. China has continued to show very respectable economic numbers and is showing waning inflation pressure. It also said it will continue to help support domestic spending. In the U.S., the worst of the housing downturn seems to be over, and corporate America is posting better-than-expected earnings and is sitting on record cash holdings, which will likely be deployed in the economy. In sum, investors are no longer overly worried about a double-dip recession in the Western world, nor are they seriously thinking about a hard landing in China. This has helped to boost the appetite for risky assets such as commodities.
Today’s rally can be traced to a significantly weaker U.S. dollar (a considerably firmer stronger euro) and positive economic indicators. European July confidence in the economic outlook rose to the highest level in more than two years, and the U.S. first-time jobless claims fell a larger-than-expected 11,000 last week.

Bottom Line: Despite downside price risks present in the system, BMO Research expects global growth to average about 4% in 2010 and 2011, with China averaging near 10%. The resulting demand growth is expected to materially tighten up the supply/demand fundamentals for most industrial commodities, helping to lift prices sustainably higher into 2011. This is in line with historical norms, where strong global growth coupled with extraordinarily low real interest rates in most major economies has been bullish for risky assets such as commodities. Among the industrial commodities, copper, palladium, platinum and silver are favoured most due to supply rigidities.