Geopolitical Tensions Boost Commodity Prices

February 21, 2011

North American markets will be closed today to commemorate President’s Day in the United States and Family Day in Canada.  Wintry weather has returned to the Northeast.

China too has caught the contagious bug of social unrest.  President Hu urged tighter controls of the internet.  High food costs, as in the middle east, have been a catalytic factor.  Gold climbed above $1400 for the first time since very early January, gaining 1.1% to $1403.90 per ounce, while oil shot up 3.6% to $89.27 per barrel, a gain of 6% in less than four trading days.

Reaction to the G20 Paris communique has been muted.  The text can be found in my review.  Analysts noted that officials continue to talk about broad goals without agreeing on concrete steps.

Asian stocks continued to fall partly in reaction to China’s reserve requirement hike announced Friday.  Surprisingly, China’s bourse with a gain of 1.4% was an exception.  Elsewhere in the Pacific Basin, stocks dropped 1.3% in India, 0.9% in New Zealand, 0.7% in Sri Lanka and Australia, 0.5% in Singapore and Hong Kong, 0.6% in Pakistan, and 0.1% in Taiwan.  Japan’s Nikkei eked out a 0.1% rise, but equities so far are down 0.9% in France, 0.8% in Germany and 0.4% in Britain.

The dollar is narrowly mixed, with gains of 0.3% against the Australian dollar, 0.2% against the Swiss franc, and 0.1% versus the euro, sterling and yen but losses of 0.3% against the kiwi, 0.2% relative to the Canadian dollar and 0.1% against the Chinese yuan.

The yields on ten-year German bunds and British gilts dropped five basis points apiece, while that on the 10-year JGB is up one basis point.

The euro did not get lifted further by the release of better-than-expected preliminary purchasing manager survey readings for February.

  • Euroland’s composite PMI rose 1.4 points to 58.4, the best score since July 2006.  The manufacturing index (59.0) was the highest since June 2000 with very strong export demand, while the services PMI advanced from 55.9 in January to 57.2, best since August 2007.  Encouraging news is that export demand improved even for the peripheral economies, but a concern has to be the intensification of inflationary pressure to the most since mid-2008.
  • The German composite PMI reading of 61.5, though up just 0.2, was the highest reading in 56 months.  Manufacturing (62.6 after 60.5) stood at a record high for this data series, but services slid 0.8 to 59.5, a two-month low.
  • The French composite PMI jumped to 59.5, a six month high after 57.6 in January.  Manufacturing rose 0.4 points to a two-month high of 55.3, and services improved three whole points to a seven-month peak of 60.8.  French activity is back to 3Q10 levels.
  • These results suggest that economic growth in Euroland at least doubled in strength to around 0.7% in the present quarter.

The German IFO Institute’s monthly business and service-sector climate survey results corroborated that Euroland’s largest economy is experiencing very robust growth.  The business climate index for February advanced to 111.2 from 110.3 in January, 106.8 last August and 95.4 in February 2010.  Current conditions rose 1.9 points to 114.7, accounting for the bulk of the improvement.  Manufacturing, construction, wholesaling and retail each had better readings than in January.  The service-sector climate index rose five points to 33.0 and was 13 points better than six months earlier and 26.2 points above its year-earlier level.

German Chancellor Merkel’s Christian Democratic Party suffered an unexpectedly severe defeat in Hamburg regional elections on Sunday, taking just 20.8% of the vote, down from 42.6% three years earlier.  The voter share for the left-leaning Social Democrats increased to 49.8% from 34.1%, giving that party a seat majority and causing the CDU to lose three seats in the upper house of the Federal parliament.  This will hamper Merkel’s ability to govern.  There are six more regional elections scheduled in 2011.

HSBC is now calculating a preliminary Chinese purchasing managers index that will embody 85% of the information that goes into the final estimate.  The manufacturing PMI in China fell three points to a seven-month low of 51.5 in February as export orders and jobs contracted, while inflationary pressure rose.

Brazil’s service-sector purchasing managers index for January rose to a 10-month high of 52.7.  Brazil’s composite PMI likewise constituted a 10-month high, suggesting greater-than-assumed momentum to start 2011.

Japan’s all-industry index, a supply-side monthly estimate of GDP, slipped 0.2% in December to post the fifth drop in a row.  The all-industry index fell by 1.1% last quarter and posted on-year increases of 1.9% in both December and 4Q versus 3.1% in the year to 3Q10.  In December, a 3.3% resurgence of industrial production was mitigated by drops of 0.8% in the tertiary services index and 0.1% in construction.  Public spending was unchanged in the latest month.

Credit card spending in New Zealand jumped 3.8% in January and recorded the biggest on-year rise (5.6%) in ten months.

Thai GDP rose 1.2% last quarter and 3.8% on year.  GDP grew 7.8% in 2010.  Hong Kong’s jobless rate of 3.8% in the three months to January was the lowest since 3Q08 and below market expectations.

The British Rightmove house price index increased 3.1% in February but the 12-month increase of 0.3% was still below the gain of 0.4% in the year to January.  The outlook for Britain’s housing market is not good despite the strong on-month advance.

Swiss M3 advanced 6.7% in the year to January.  Italy’s trade deficit with non-EU economies of EUR 2.57 billion last month compared favorably with EUR 2.98 billion in December and EUR 3.40 billion in January 2010.

Copyright Larry Greenberg 2011.  All rights reserved.  No secondary distribution without express permission.

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