European debt crisis, political developments in US cited as key market movers

SINGAPORE - Commodity prices, which have surged to the highest level since January, may see greater volatility as investors react to threats to the global economic recovery, according to Societe Generale SA.

"We're not completely out of the crisis," Olivier Godin, the bank's head of commodities derivatives in Asia, said in an interview from Hong Kong. "There might be some bumps along the way, and that's going to affect our markets."

The Reuters/Jefferies CRB Index of 19 raw materials has advanced to an eight-month high, driven by a weaker dollar. Cotton jumped to the highest price in 15 years Tuesday amid a supply squeeze, while gold climbed to a record on Monday. Wheat more than doubled between June and August as drought slashed the Russian harvest. Corn has rallied to a two-year high.

The European government debt crisis, shifts in currencies, or US political developments may "move the market as much as fundamental factors", said Godin, who works for SocGen's corporate and investment banking arm and has traded commodities for more than 15 years.

Investors planned to increase their commodity investments over the next three years, expecting returns to match or beat historical averages, Barclays Capital, the investment-banking arm of Barclays Plc, said in March, citing a survey.

Quick reaction

"Commodities will react very quickly to any global, macro factor, much more these days than before with the growth of investors' participation," Godin said on Sept 22.

Asian stocks and commodities declined Tuesday on concern that Europe's debt crisis may slow global economic growth. "Concerns about the global economic outlook haven't cleared," said Yasushi Noguchi, a strategist at SMBC Friend Securities Co in Tokyo. The CRB Index's 30-day historical volatility, a measure of how much commodities fluctuate, declined to 11.3 percent last week, the lowest level since Oct 2007. The measure rose to 50 percent in Nov 2008 as prices collapsed following the failure of Lehman Brothers Holdings Inc.

Europe's sovereign debt crisis, which began in Greece, stoked investor concern earlier this year that the possibility of a default may derail the economic recovery. The crisis sent the euro lower and hurt commodity prices, including copper. The metal, seen by some investors as a gauge of economic activity as it's used in construction, slumped 16 percent in the three months to June 30, the worst quarterly performance since 2008. Three-month futures also dropped as authorities in China, the largest metals user, curbed loans for third homes and raised mortgage rates from mid-April to prevent asset bubbles.

Copper has risen about 21 percent since the end of June as the Dollar Index fell 7.3 percent. The contract on the London Metal Exchange reached a five-month high of $7,990 a ton on Sept 24, and was at $7,862 at 3:04 pm on Tuesday in Singapore.

"In the last five years, there's been a very important growth in the commodities trades in Asia, especially from China," Godin said. "I don't see why that will not continue because raw materials are transformed and consumed in great deal in emerging countries like China and India."

China's economy may expand 9.5 percent this year, according to State Council researcher Zhang Liqun. The country outpaced Japan as the second-largest economy in the last quarter, and last year overtook Germany as the largest exporter.

Bloomberg News

(China Daily 09/29/2010 page16)