• Investment World
• eWorld
• Brand Line
• Mentor
• Life
• Canvas
• Praxis
• Urban Pulse
• Brand Quest
• The New Manager

Stocks

• Quotes
• SE Diary
• Scoreboard
• Open-End Mutual Fund

Cross Currency

• Rates
  
  

Shipping

• Ports
  
  

Archives

• Yesterday
• Datewise
• Resources
• In Focus
• In Depth

Group Sites

• The Hindu
• Business Line
• Sportstar
• Frontline
• The Hindu eBooks
• The Hindu Images

G. Chandrashekhar

Growth expected to be resilient in second half this year

Mumbai , June 27

Most of the discussion in the international commodity market these days is centred, not around whether the Fed would raise the fund rate but by how much and in what timeframe. As a sequel to the Fed's stepped-up anti-inflation rhetoric, industrial and precious metals prices have been hit hard.

Little wonder that expectations over the trade-off between inflation and growth have become a key driver of commodity prices last few weeks. Where is the interest rate headed?

Hawkish tone

For instance, Barclays Capital has revised its Fed interest rate call to six per cent this year (to be achieved towards end of the year), up from the earlier forecast of 5.5 per cent.

This implies a more hawkish tone from the Fed over the coming months than the market is currently expecting, something that is likely to be negative for both base and precious metals prices.

It must, however, be emphasised that fundamentally, supply and demand trends are strong in the market, with growth propelling higher consumption demand in the form of consumer and corporate spending.

Exposure to energy, agri

Growth is expected to be resilient in the second half of the year. That should translate to an upside bias for prices; but overriding macro-economic uncertainty points to further volatility in the coming months.

However, for now a defensive strategy would underweight the base and precious metals sectors while raising exposure to energy and agriculture, which have so far proved much more resilient to the market concerns over inflation/growth trade-off, according to an analyst.

With the prospect of a hike in Fed fund rate, the recent pattern of sideways and highly volatile trading is expected to continue for most of the third quarter, insofar as base metals are concerned. Justified by fundamentals, there could be another move higher for base metals before the end of 2006; and such strength could persist into early 2007.

Gold scenario

If expectations of interest rate spikes come true, the market inflation expectations could stay contained, while the US dollar's depreciation against European currencies could be slowed.

This will create a less positive scenario for gold. In other words, the risk for the potential upside for gold in the coming months is limited.

As far as the energy sector is concerned, for investors the recent performance of energy has proved more stable than that of other commodity sectors, with oil and refined product prices trading well within their recent ranges.

DIMNISHING SCOPE

"We view price risk as weighted to the upside in oil markets as fundamentals appear to be tightening on the back of robust demand growth and limited non-OPEC supply additions," Barclays Capital said, adding that total net length has been substantially reduced in recent weeks, diminishing the scope for further liquidation.

CBoT corn prices are seen having an upside bias on account of strong US ethanol demand, robust Chinese corn demand, and a potential decline in 2006 US corn production.

Cotton prices are also expected to strengthen because of strong projected import demand from China to meet textile industry needs.

More Stories on : Metals | Economy | Financial Policy | Interest Rates

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page

Stories in this Section
Farmers urged to resume sowing

Copyright © 2006, The Hindu Business Line. Republication or redissemination of the contents of this screen are expressly prohibited without the written consent of The Hindu Business Line