With US and UK markets closed for holidays tonight, watch commodities for signs of pressures from the growing concerns about the level of sovereign debt and inflation.
The move to put the UK on notice that its AAA rating might be cut because of rising spending and debt levels has spread to the US, and will touch Japan and other highly indebted countries (Ireland, Greece, Italy for example, plus Eastern Europe).
This is the sort of situation where the slow rise in commodity prices, led by oil, and the jump in US interest rates (up to 3.45% for 10 year bonds on Friday) will start impacting on investor sentiment.
We saw signs of that on Thursday and Friday.
Australian 10 year bond yield are now well over 5.20%, the highest for months.
The US dollar is weakening, the Aussie dollar is stronger, and some would take this as a sign that risk is back in fashion (See the story on the Merrill Lynch global fund managers’ survey).
But as we saw in 2007 and 2008, there’s a terrible feedback loop here: speculative attacks on the dollar drive it down, allowing long positions in commodities, such as gold, oil copper, silver and some grains to generate profits as the falling value for the greenback transmits into rising commodity prices.
There is already public concern about the growing involvement of investors (AKA speculators) in some commodities, especially oil.
Oil prices rose above $US62 a barrel last week and finished Friday above $US61 a barrel, compared with lows of just above $US33 a barrel last December.
OPEC meets this week and against this background, is encouraging traders to believe that prices will rise higher.
Saudi Arabia’s oil minister Ali al-Naimi says world oil prices will hit $US75 a barrel when demand from the world economy picks up.
Bloomberg reported him as saying “We’ll get there eventually,” al-Naimi told reporters in Rome today where he will attend meetings with energy ministers from the Group of Eight industrialized nations.
“The trick is keeping it between $70 and $80. It will be achieved as demand rises and the fundamentals are better than they are now,” Bloomberg quoted him as saying.
To reach that goal, Naimi said he will recommend OPEC members “stay the course” at their meeting in Vienna on May 28.
He said oil should be kept at about $75 a barrel “because that is what is desired for the world economy.”
OPEC and the International Energy Agency have both cut their global oil forecasts this month for the rest of 2009. OPEC estimates daily oil demand will fall by 1.57 million barrels, or 1.8%, to 84.03 million barrels of oil a day this year.
That’s usually a sign of price weakness, not pressure as more and more investors pile into oil looking for gains as the US dollar weakens.
With OPEC meeting this week, activity in commodity markets will rise.
So will activity in US credit markets with the US Government auctioning $US101 billion of bonds this week of varying maturities.
That will drive a lot of speculation in all markets, especially if any other data is negative.
The four day down streak last week for US stockmarkets is a symptom of that speculation and concerns.
The Dow fell 14.81 points to 8,277.32. The Standard & Poor’s 500 Index fell 1.33 points to 887.00 and Nasdaq ended 3.24 points lower 1,692.01.
For the week, the Dow rose 0.1%, the S&P 500 half a per cent and Nasdaq 0.7%.
Gold hit a fresh two-month high, rising above $US960 an ounce for the first time since late March.
In Asia, the MSCI Asia Pacific Index rose 2.1% last week as Asian markets continue to rally strongly, up 41% since the MSCI benchmark dropped to a five-year low on March 9.
Japan’s Nikkei Index lost 0.4%, a second consecutive weekly decline. Indexes throughout the Asia region rose, except in Australia, New Zealand, Pakistan and China.
Here they ended down on Friday and for the week.
Shares were down 1.4% on Friday and 3% off its two-month rally to May 8. For the week it fell 0.3%.
Europe’s Dow Jones Stoxx 600 Index eased 0.3% on Friday to cut the weekly gain to 2%.
European markets are up 31% since the lows of March 9.
Indexes fell 6 of the 17 western European markets that were open Friday. The FTSE 100 added 0.4% for the week.
The index is down 1.6% this year after rising 26% since the six-year low on March 9.
With attention on oil, gold and copper, wheat has been forming under the radar, but Friday saw it hit a four month high, thanks to renewed buying last week as the US dollar fell.
There are some analysts starting to wonder if we will see a re-run of last year with activity in commodity markets driving oil and foodstuffs higher, which will in turn choke off consumer demand and spending power and plunge the global economy back into the depths of the recession.
July wheat futures rose 19 cents, or 3.2% to $US6.125 a bushel on Friday on the Chicago Board of Trade. Earlier, the price reached $US6.18, the highest since January.
The grain has gained 14% this month as the US dollar has weakened and speculation has risen that poor weather may cut production in the current crop.
