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Sunday, Oct 10, 2004

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Markets nervous over `cocktail of concerns'

Batuk Gathani

Brussels , Oct. 9

GROWING nervousness in financial and commodity markets amid a "cocktail of concerns" has, this week, triggered pessimism all round - with a depressing effect on the stocks markets on both sides of the Atlantic.

In the background, there is the spectre of inflation which is worrying policy makers, who are trying hard to boost economic growth, reduce unemployment and keep a "stern check" on inflation (which should remain below the 2.5 per cent).

The situation has worsened as crude oil price has hit the $53-mark. This is the highest level for more two decades. Simultaneously, metal prices climbed to over 10-year peaks. All recent optimism about an "economic pick-up" is slowly fading.

The markets are headed for a modest decline as commodity indices rise to a 23-year high. The speculators are moving towards large investments in the commodity indices, which have been propelled at a record high by investor's interest.

According to Goldman Sach, investment funds flowing into the commodity indices have more than doubled in two years to $25 billion and the clients include pension funds and high net worth individuals.

This is the ground reality, and the perception in the markets is that the commodity index bubble "may burst" if oil and metal prices commence a sharp decline. There is speculation as to how and when this will happen amid talks of "gut instincts" among key investors.

There is a marked and epoch-making "psychological shift" in the commodity prices led by crude oil prices. An investment adviser said, "$50 is no longer considered a ceiling. Oil is now looking at a floor price."

Along with oil, copper, aluminium and other key metals have hit a record high in 11 years. Major airlines are busy raising surcharges on long haul flights and there is also intense competition to attract passenger traffic.

The turbulence in the oil market has been triggered by the political unrest in Nigeria, which produces more than two million barrels a day and is the fifth largest source of crude oil for the US.

There are different perceptions about the oil markets behaviour. The pessimistic view is that oil prices could head for the $60-mark if the Nigerian unrest persists, the US and West European inventories of "strategic stock" decline and consumption of oil is accelerated on both sides of the Atlantic in the coming winter. There is again speculation on how "hard" or "soft" the 2004 winter will be.

With most oil producers "stretched to their limits", any further disruption in supplies either by acts of terrorism or political instability in major oil producing countries could have dramatic consequences.

Iraq, Nigeria and Venezuela are passing through a phase of disruption. And Iran with its "menacing potential nuclear cloud" and all that it entails is also a major question mark. Hence, the common perception among investors is that "markets are volatile amid much uncertainty."

Most IMF and World Bank global economic projections have been based on the $37-a barrel oil mark. The current $53-mark (heading towards $60-mark) can fundamentally alter all projections about global economic growth.

With rise in interest rates in the US and Europe, record-high house prices can suddenly collapse. There is also the China factor with growing demand for more oil and metal commodities. These are the realties boosting imponderables in the global economic scene.

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