Commodities to fall but 'no panic'

SINGAPORE: Commodities, except gold, will likely fall when markets open today due to a US ratings downgrade and a worsening debt crisis in Europe, but panic shall be avoided.

Bullion should benefit from renewed risk-aversion while outlook for demand for oil, base metals and grains deteriorates.

Strong economic growth in China - the world's top copper consumer, No. 2 oil user and major buyer of grains - as well as tight global supplies for some raw materials, including coal and iron ore, will provide certain support and some investors may see weakness as a buying opportunity.

"It should be an orderly decline, nothing to panic about. The important thing now is that confidence doesn't slip too far," said Citigroup analyst David Thurtell. 

Standard & Poor's cut the long-term US credit rating to "AA-plus" on Friday, a move that over time could ripple through markets by pushing up borrowing costs and making it more difficult to secure a lasting recovery.

The cut in ratings for the world's largest economy and a spreading crisis in Europe prompted global policymakers to hold an emergency conference call yesterday to discuss the debt crises in the US and Europe.

"I would expect price action to be choppy and volatile and downward pressure on prices are likely to remain until a more certain trajectory to economic growth is ascertained," said Amrita Sen from Barclays.

The US dollar may weaken and Treasury yields rise after S&P's move, though any selling is likely to be tempered by the escalating crisis in the euro zone.

Olivier Jakob from Petromatrix said a potential steep fall in equities could drag commodities down as some hedge funds will be facing margin calls.

"However if the US dollar debases further that could have a short-term positive impact on oil due to the computerised trading on the dollar fluctuation. But given that the rest of the world (China, Europe) are facing their own financial problems we do not think that any support from a weaker dollar will have a long and lasting impact on the oil prices".

The Reuters-Jefferies CRB index, the 19-commodity benchmark, fell nearly 4.5 per cent last week, its steepest drop since a rout in early May fuelled by concerns about a stalling global economic recovery.

London copper should lead base metals lower and grains may also retreat while gold could retest new peaks.

Gold hit an all-time high of US$1,681.67 (RM4,995) an ounce on Thursday, its 10th record in 18 sessions.

"The initial reaction will be a high degree of uncertainty and thus volatility since investors will not know where to turn for safety," said Mark Mobius, executive chairman of Templeton Emerging Markets group which oversees US$50 billion (RM150.5 billion) in emerging market assets.

"During the sub-prime crisis safety was in US dollars and US Treasuries. Now that anchor to the global community is deteriorating," he said in an email.

However, with China's economy, the world's second largest, continuing to expand strongly, "commodities could be a bit of a haven on a China play," said Citigroup's Thurtell.

"China has not excessively borrowed, they've got a pretty good fiscal position, they've got very high foreign exchange reserves, so China's got the ability to keep growing and that's the bottom line in commodity markets," he said. - Reuters

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