The Hindu Business Line : The fizz flattens

Whether the meltdown in the global equities and commodities markets — India included — has shaken the confidence of investors is debatable. While such gyrations are in the very nature of the markets, the ground reality is that some investors are pulling out their investments from financial markets. Those who entered late, but couldn’t exit soon enough have suffered losses. No doubt, there has been a surfeit of what can be called ‘speculative froth’, and this is what seems to be flattening. Commodity markets too have been impacted by the current global volatility, going against the age-old wisdom that equity and commodity markets move in opposite directions in times of uncertainty. Clearly, investors perceive commodities and their derivatives as nothing more than financial instruments. Across the world and across asset classes, markets are integrating. As funds seamlessly flow from one market to the other, what happens in one market is sure to have a contagion effect on others.

Insofar as commodity markets are concerned, the panic is likely to die down soon. The OECD Composite Leading Indicators (CLIs) published last week signal a positive outlook for major global economies, including the OECD non-member BRIC countries. Although there is mismatch between the financial market panic and CLI data, the possibility of stronger, rather than weaker, global demand for commodities is far greater now. Likewise, fears of an economic slowdown have largely receded. Commodity demand, especially for energy and metals, is poised for a robust recovery in the light not only of global growth prospects but also huge sums of money flowing into manufacturing activities and infrastructure development. India cannot remain insulated from global influences. The crude oil market is tightening, with supply growth set to trail demand over the next six months. Energy prices have a strong upside bias. The strong positive correlation between global economic growth and metals demand means that consumption of industrial metals and base metals is set to expand, especially in major Asian economies.

Agricultural markets may display some softness over next several weeks because of the impending harvest in the northern hemisphere. It would be wise not to be misled by the downtrend and believe prices will stay low. . The rupee’s uptrend is losing steam and any softness will push the cost of imports higher. The government’s inflation control measures have brought some relief to the really needy. There is danger the advantage may be frittered away if policymakers believe the current downtrend will continue or that prices will stabilise at lower levels. The upside risk to commodity prices means a downside risk to the economy, especially the poor.

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