The big share market sell off ran out of puff in the US overnight, where it started on Friday.
The Dow and other indices closed all but steady, but the US dollar was weak.
The Australian dollar bounced over 94 US cents in reaction to not only the greenback’s weakness, but another surge in commodity prices.
Oil hit a new record of $US103.95 a barrel, before retreating to around $US102.50, gold hit $US992 an ounce during trading before falling back to $US984.70 an ounce, up more than $US7; silver hit $US20 an ounce and stayed there, wheat rose again, sugar hit a new 18 month high of more than 15 US cents an ounce, copper and nickel also rose.
Traders reckoned commodities rose on increased investor demand for a hedge against declines in the dollar and quickening inflation. But that’s rubbish.
Other traders said there were rumours of two big new investment funds plunging into the booming commodities sector in recent days and building up volumes.
Commodities across the board have risen in the last few weeks as recession fears have shaken the dollar.
This has been pushed along by the weakening dollar which hit a new low today following weak reports on US manufacturing and construction spending: both of which show the slowdown accelerating..
So far this year, the Goldman Sachs Commodities Index is up 11% or more, while the Dow Jones industrial average has fallen over 7% and commodities have climbed 30% since September 18 when the first of five cuts by the Federal reserve in the Federal Funds rate sent the dollar lower.
Foreign commodity funds based mostly in Europe are using the stronger euro to finance their plunges into commodities which are exclusively priced in US dollars.
Some commodities, such as wheat, corn, soybeans, edible oils and platinum are being driven by supply demand considerations: especially continuing strong levels of demand for agriculturals from China.
But even in the so-called ‘softs’ the presence of financial investors is disturbing prices, driving them higher (and lower as in wheat prices last Thursday and Friday which fell 10%).
On the economic front, the Institute for Supply Management’s index of manufacturing activity was lower than expected. The index, which surveys purchasing managers, dropped to 48.3 from 50.7 in February. Economists were expecting a reading of 49. Any reading below 50 indicates contraction.
And in a separate report, the US Commerce Department reported that American construction spending fell 1.7% in January, marking the largest drop in 14 years. Remember residential construction investment plunged by 25% in the December quarter, so the slump is continuing.
Eurozone inflation figures released Monday showed the annual rate remained at 3.2% in February, well above the European Central Bank’s 2.0% target.
The ECB holds a rate-setting meeting on Thursday but won’t cut rates because of the high level of inflation..
Copper rose as much as 2.7% to $US8,661 a tonne in London, the highest since May 2006, and nickel rose as much as 8.1% to $US34,050 a tonne, the highest in four months.
Industrial metals such as copper probably have the most to gain in the next week or two while agriculture markets such as wheat probably have the least to gain, Corrigan said.
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European markets fell for a fourth day in a row , led by financial companies, such as big insurers and banks.
The Dow Jones Stoxx 600 Index fell 1.4% in London; the index has dropped 14% this year as analysts slashed profit-growth estimates because of the subprime mortgage crisis, credit crunch and slowing US economy.
National benchmarks fell in all 18 markets in western Europe. France’s CAC sank 1%; Germany’s DAX eased 0.9% and the London’s FTSE 100 slipped 1.1%.
The DAX has dropped 17% so far this year, the second- biggest decline after India among the world’s major markets.
Allianz SE, Europe’s largest insurer, fell, Swiss banking giant, UBS AG fell for a third day in Zurich and in London HBOS Plc declined as on broker downgrades of the UK’s largest mortgage lender.
Barclays, Britain’s third-biggest bank, lost 3.2%; BNP Paribas SA, France’s largest, slipped 1.5%.Swiss Reinsurance Co., the world’s biggest reinsurer, declined 3.5% and Prudential, the UK’s second-largest insurer, shed 1.6%.
In contrast, HSBC Holdings shares rose 3.1% percent after Europe’s biggest bank by market value said profit rose 21% to $US19.1 billion last year as emerging-market lending made up for subprime losses in the U.S. Write-offs and bad debts surged $US6.4 billion to $US17.2 billion as the company increased its loss provisions in its stumbling US business, HFC.
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Nervous investors wiped off $38.5 billion, or almost 3%, from the value of the Australian share market yesterday amid heavy selling of bank stocks and Telstra.
It seems any stock with a hint of leverage, earnings weakness, or just seemingly vulnerable, was hit.
The banks were signled out, as they were elsewhere in Asia and in Europe overnight.
Concerns about rising borrowing costs and growing evidence of a US recession were at the forefront of many investors’ minds, especially with the Reserve Bank expected to lift interest rates later today.
Markets in Asia fell as well as the region caught up to Friday’s 315 point 2.5% drop on the Dow and Wall Street.
It was thought a week or so of calm was too much and a five per cent rise in some markets was too far for the realities of investor sentiment.
The S&P/ASX200 index fell 166.3 points or 2.98% lower to 5405.8 points and the All Ordinaries index shed 164 points or 2.89% to 5510.7.
Among the banks, Commonwealth Bank was down $2.13 or a huge 5.06% to $40.00, ANZ was down $1.07 or 4.86% to $20.93, Westpac fell 57 cents or 2.44% to $22.75 and N
