WebBroker Select News Alert

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Waiting for commodities? Keep waiting

RTGAM






Commodity prices showed a little life in December - if only briefly - after investors warmed to the idea of a big infrastructure spend in the United States and attempts in China to get its economy humming again, both of which stirred earlier dreams of gargantuan copper and oil consumption.


However, Larry Hatheway, an economist at UBS, isn't so sure that a rebound is really in the works in the near term. For one, commodity prices - and yes, that includes crude oil prices - tend to lag the business cycle, not lead it. That means there would have to be clear evidence of a new business cycle for commodities to take off on a sustained tear, and there isn't any.


"Despite some hopeful (if preliminary) recovery signs from China, the incoming macro data flow in the rest of the world remains very poor and is hardly likely to instill confidence in a cyclical turning point just yet," Mr. Hatheway said in a note, adding that commodity inventories continue to build toward cyclical peaks because output hasn't fallen at the same rate as demand.


Secondly, the U.S. dollar has been surprisingly strong against a number of currencies, with investors viewing the greenback as the best of a bad bunch - particularly commodity-base currencies and the untested euro. Since commodities are priced in U.S. dollars, any strength in the currency should keep commodity prices down.


"Overall, we conclude that despite significant price declines and improved 'valuations', cyclical commodities - including industrial metals and energy - are unlikely to sustain significant rallies soon," he said, recommending an 'underweight' position on commodities. "We intend monitoring inventory and global demand conditions - above all signs of a re-acceleration in China - as key indicators to become more constructive on industrial metal and energy prices."

Copyright 2001 The Globe and Mail

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