Commodities Bounce Back But Gains Appear Short-Term

Commodity markets saw some calm Monday with base metals bouncing higher, benefiting from the recovery in equity markets following the US Federal Reserve's discount rate cut, but traders and analysts tipped the move higher to be short-term at best.

"Market sentiment is slightly steadier after last week's sharp decline, but the outlook remains bearish and volatility is going to remain a factor until the full extent of the US subprime crisis is known," said Tetsu Emori, an analyst with Mitsui Bussan Futures in Tokyo. Concerns over lingering risks to the economy from the recent financial market turbulence prompted the Fed to cut discount rates, or the rate it charges banks on loans from the central bank, by 50 basis points to 5.75% late Friday, triggering a rally in equities and commodity markets. Australian mining stocks were quick to regain some of the lost ground with BHP Billiton Ltd. up 7.27% and Rio Tinto Ltd. up 5.04% on the Australian Stock Exchange, where the benchmark S&P/ASX 200 index was up 2.9%. In other Asian markets, Hong Kong's Hang Seng index rose 3.61% and Japan's Nikkei was up 3.57%, setting commodity markets on course for a steadier day. The gains helped base metals move higher, with three-month copper on the London Metal Exchange up $60 at $7070/ton and nickel up $800 at $26,800/ton. Copper futures on the Shanghai Futures Exchange rose in early Asian trading, with the benchmark October contract rising CNY1,020 to end the morning session at CNY62,810/ton. Rubber futures in Tokyo were also higher in line with gains in other markets. "Fundamentals have been overtaken for now by outside factors and rubber appears to be moving in sync with financial markets. Tocom rubber has rebounded as the yen has fallen against the dollar and the Nikkei has bounced back from recent losses. But the outlook remains uncertain and rubber traders will continue looking at the wider financial picture for indicators," said Shuji Sugata, a rubber trader at Mitsubishi Corporation Futures in Tokyo.

Recovery Still Not Broad-Based

Although the recovery has calmed nerves after a tumultuous week and reduced fears of a wider impact on the global economy, many commodity market participants said it would only offer short-term reprieve, with the possibility of more bad news still rather strong. "It will be some time before commodity markets de-couple from the tumult going on in the financial markets," said Edward Meir, an analyst at MF Global, in a note to clients. Oil prices, for example, were unable to make gains Monday. Oil lost ground instead, as traders unwound positions on expectations that Hurricane Dean will miss key USGulf production facilities. "Should we get another sharp drop in equities, energy prices will most likely be swept lower in the downdraft once again," Meir said. At 0345 GMT, benchmark light sweet crude oil futures for September delivery were down 72 cents in electronic trading at $71.26 a barrel. The front-month contract has lost 8.6% in value since touching a record high of $78.77 a barrel Aug. 1. Gold was also lower, with Japanese retail investors selling the yellow metal following its inability to close above $600 per troy ounce Friday. Gold rallied to an intra-day high of $664.10/oz after the Fed move triggered a recovery in equities markets Friday, but closed at $656.30. "All eyes are on the (Japanese) yen," said Peter Tse, senior trader at Scotia Mocatta in Hong Kong. "If the yen goes down to Y112-Y113, obviously gold will go down." At 0420 GMT, spot gold was trading at $654.70/oz, down $1.60 from Friday's New York close.

Near-Term Worries Not Over Despite Strong Demand

Fundamentally commodity markets still look good, and a strong outlook on the demand side from China, India and other developing economies was likely to mitigate any slowdown in the US economy, analysts said. Other factors such as current and potential labor unrest in Mexico and Peru should also boost copper's short-term fundamentals, although the overriding factor for direction still remains the equity market, said Commonwealth Bank of Australia Analyst David Moore. Most analysts said commodity markets will dip further before staging any meaningful recovery. "In the near-term, all eyes are still on global equities. It's too early to say the subprime story has ended," said Wang Zheng, an analyst with Fubao Metals Co. in Shanghai. "Metals markets are likely to remain volatile and there will be more withdrawals of short-term investor funds. We're likely to fall before running up again," said ANZ Analyst Andrew Harrington. For gold, analysts were divided over the metal's return to more 'normal' trading correlation of usually trading inversely to the dollar and equities and as a safe-haven investment. "It depends on the dollar's direction over the next 24 hours, but gold could re-establish its inverse trading pattern," said CBA's Moore. While equities market are expected to perform strongly Monday, the longevity of the Fed's intervention in various markets was questionable, said Jon Nadler an analyst with Kitco. "Investor confidence may not return for a while as the move does not begin to address the structural problems inherent in the credit mess, the true size of which remains an unknown at this time," Nadler said.