How might QE2 boost commodities prices? ¿Cómo podría QE2 elevar los precios de las materias primas?

(Para la versión en español, desplácese hacia abajo.)

The Fed's second round of quantitative easing (QE2) can boost commodities prices through four channels. First, by depressing Treasury yields in the middle of the yield curve and (it is hoped) by inflating prices generally, it can exert downward pressure on the U.S. dollar against other currencies such as the euro.

Of course, this would boost global commodities prices in dollar terms only (it would have the opposite effect on prices in euro terms, for example).

This tranmission channel pertains to all segments of commodities. Equally, it pertains to all other traded goods and services priced in U.S. dollars. QE2 is aimed, after all, at inflating dollar prices.

Second, by generating confidence that the U.S. economy will avert deflation and thus stir up hopes that growth will take off, it can draw speculators into the futures markets for industrial commodities: energy commodities and base metals.

Third, by generating fear of hyperinflation even while boosting high hopes for industrial commodities (in an unusual confluence of events), it can provide support for precious metals. Of course, this support will be iffy and unstable, as with any price support that relies on mere raw feelings such as fear.

Fourth, by depressing Treasury yields (in the middle of the curve), it can draw investors desperate for yield into the asset class.

Follow me on Twitter: @gsignoret

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La segunda ronda de relajamiento cuantitativo (QE2) de la Fed puede dar ímpetu a los precios de las materias primas por cuatro vías. Primero, al deprimir los rendmientos de los bonos del Tesoro en medio de la curva, puede deprimir el dólar frente a otras monedas como es el euro.

Claro, este fenómeno reforzaría los precios de las materias primas en términos únicamente del dólar (tendría el efecto contrario en las cotizaciones en euros, por ejemplo).

Esta via se aplicaría a todos los segmentos de las materias primas. Asímismo, se aplicaría a la cotización en dólares de cualquier otro bien o servicio transable. El propósito del QE2, recuérdese, es inflar los precios en dólares.

Segundo, si genera confianza en que la economía estadounidense puede evitar la deflación y así despertar esperanzas de que el crecimientos despegue, puede atraer inversión especulativa hacia los mercados de futuros de materias primas industriales: energéticos y metales base.

Tercero, al generar miedo de hiperinflación al mismo tiempo que despertar esperanzas para las materias primas industriales (en una coincidencia de eventos inusitada), puede dar soporte a los metales preciosos. Claro, dicho soporte será incierto e inestable, como suele ser el caso cuando un precio toma su soporte de puros sentimientos primitivos.

Cuarto, al deprimir los rendimientos del Tesoro (a la mitad de la curva), puede incitar a inversionistas en búsqueda desesperada de retornos a entrar en esta categoría de inversión.

Sígame en Twitter: @gsignoret

Financial Market Team update (English)

15:09 ET

Monetary policy statements depress markets
The Bank of England's Mervin King said that "the UK recovery is likely to continue, but the overall outlook is weaker". (Read Mervin King's statement here.) The Fed and the Bank of England determined that quantitative easing would continue but would not be expanded. Major American, European and Asian stock markets fell today by more than 2%.

Currencies
The euro is at its lowest level for a month. It was down by more than 2%, representing its steepest one-day drop since January 2009. Although the yen reached its lowest level against the dollar earlier today (Y84.79), it is paring losses.

Treasury bonds
2-year, 5-year, 7-year and 10-year Treasuries have been falling; at one point during the day they reached record-low yields.

Commodities
According to the International Energy Agency's Oil Market Report released today, global demand for 2010 and 2011 is expected to rise as a result of an expected GDP increase. However, because of the BP's oil spill, a supply shortage is expected in 2011. Crude oil continues to fall for the fourth day and is now below US$80. Wheat futures are slightly down while corn futures are rising. After sugar rose yesterday on speculation that Russia's production of beets would be affected by the drought, it fell today on expectations of Indian exports.

(Read more about global markets in FT $ )

Patrick Signoret and Georgina Lara

Financial Market Team update (English)

Commodities
Commodities are falling. Gold prices fell for the second straight day. Copper prices are down, reaching a one-week low. Russia's drought has affected beet production and beets are used to make sugar, so sugar prices are rising. However, wheat and corn prices are down about 1.5%. A wheat producing region in Australia, the world's fifth exporter of wheat, is forecast to receive much needed rains. Read about Australia's wheat situation, in this FT article ($).

WTI prices fell the most in five weeks, despite a storm forming in the Gulf of Mexico which made drilling on a BP relief well stop.

Currencies
The dollar is rallying against the euro and the pound, although it is weaker against the yen.

Fixed income and credit
5-year and 10-year Treasuries are reaching their lowest yields for the year.

(Read more about today's financial data in this FT$ article, and in this Bloomberg webpage)

Patrick Signoret and Georgina Lara

Financial Market Team update (English)

Stocks
The Federal Reserve will announce its monetary policy decision tomorrow. Markets are expecting the Fed to keep interest rates at their current level, 0-0.25. However, FT and Bloomberg report that they anticipate some kind of measure to release more cash into the economy to provide a stimulus. Bloomberg believes this is the reason both American and European stocks advanced today.

Commodities
Crude oil remains near $81 as it went up in today's trading session. Grain prices continue to rise after the export ban in Russia. This has not only affected wheat but other grains as well. (Read about the grain prices in FT$.)

Patrick Signoret and Georgina Lara

Financial Market Team update (English)

Mexicana files for bankruptcy in Mexico and U.S.
Mexico’s airline filed for insolvency proceedings in Mexico and for bankruptcy protection in U.S. to avoid (more of) its airplanes to be seized by its creditors. It’s struggling to restructure its liabilities and to come to an agreement with its employees’ unions. The Mexican government is not planning on bailing the company out.
(El Financiero, Wall Street Journal)

Stocks
U.S. stocks advanced today after unexpected growth in the jobs and service industries.
Brazil's Bovespa started to rise again, after yesterday's fall had ended an 11-day winning streak.
European markets closed with mixed results and minor changes.
Asian stock markets, fell on yesterday's disappointing home sales and factory orders releases.
(FT$, Bloomberg)

Commodities
After crude oil rose 7.2% in four days, today it remains almost unchanged. U.S. gasoline inventories increased more than expected, but U.S. economic indicator releases were positive.
Gold rose for the sixth straight day.
(FT$, Bloomberg)

Patrick Signoret and Georgina Lara

Financial Market Team update (English)

16:02 ET

DJIA: -0.36% to 10636.38 (Close)
S&P 500: -0.48% to 1120.46 (Close)
Mexico IPC: -0.15% to 32768.08 (Close)
Brazil Bovespa: -0.76% to 67997.36 (Close)
FTSE 100: -0.01% to 5396.48 (Close)
DAX: +0.25% to 6307.91 (Close)

Nikkei 225: +1.29% to 9694.01 (Close)
Hang Seng: +0.21% to 21457.66 (Close)

USD-EUR: 0.7557
USD-MXN: -0.0018% to 12.582
USD-JPY: -0.7428% to 85.857
EUR-USD: +0.3949% to 1.3232

EMBI+Mex: 140
Cetes 28d: +0.009% to 4.61%

Aug 02 Aug 03
Ted spread 28 27
T bill 3m 0.16 0.16
USD Libor 3m 0.44 0.43

Stocks

US stocks fell and traded below yesterday's levels all day today on disappointing reports on home sales, factory orders, and consumer spending.

Bovespa, having advanced for 11 days straight (+9.9%), fell today after investors learned that industrial output had fallen in June by 1% from its May level.

European stocks changed little during the day. FTSE 100 fell by 0.01%, while the German DAX climbed 0.25%. DAX reached its highest level since April 26 despite the below-forecast results for U.S. home sales and factory orders.

Asian stocks rose after yesterday's better-than-expected reports on US manufacturing.

(FT, Bloomberg)

Commodities

Oil prices continue to move up on news that a tropical depression was approaching the Gulf of Mexico. After having risen by 3% yesterday, the WTI forward-month oil contract again advanced, by 1%, to $82.38. This is its highest level since last May.

Wheat prices declined after Russia reported that not all crops had been lost in the recent drought and that export volumes would hold stable. Analysts, however, warn that if Russian producers meet their export quotas, domestic shortages may ensue. Calls for a pause in grain exports have grown louder. We will continue to monitor the Russian wheat situation.

(FT, Bloomberg)

Patrick Signoret and Georgina Lara

Financial Market Team update

Georgina Lara y Patrick Signoret

13:07 ET

DJIA: +1.75% to 10649.1
S&P 500: +1.93% to 1122.88
Mexico IPC: +1.14% to 32676.39
Brazil Bovespa: +1.59% to 68587.32

FTSE 100: +2.65% to 5397.11 c
DAX: +2.34% to 6292.13 c

Nikkei 225: +0.35% to 9570.31 c
Hang Seng: +1.82% to 21412.79 c

USD-EUR: 0.759
EUR-USD: +0.9539% to 1.3176
USD-JPY: +0.0174% to 86.485
USD-MXN: -0.5749% to 12.573

Corn 1m: 0% to 406.75
WTI future 1m: +3.14% to 81.43
Gold spot 1m: +0.08% to 1184.8

Stocks
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U.S. stocks are climbing after last week's fall after today’s release of positive construction spending and manufacturing reports. Both surpassed market expectations. Better-than-estimated earnings at companies may also have increased confidence in the economic recovery.

European stocks advanced in general after HSBC and BNP Paribas rallied. Production indices in the Euro Area showed mainly increases. Germany's situation as the biggest economy in Europe and the one leading the pace to economic recovery in the zone may have boosted investors’ optimism. UK stocks reached the highest level in two and a half months.

Asian stocks advanced following PMI reports that made investors confident that the region is growing.

(FT, Bloomberg)

Commodities
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U.S. crude oil continues last week’s trend and has risen more than 3%. The rise in oil prices may be due to the controlled supply by OPEC countries and the growing demand by some emerging markets like China.

Gold also continues to rise after several days of falling.

Soybean and corn prices rose again reaching the highest level since January after the drought in Russia, and other parts of Europe, harmed crops. The demand is now being satisfied by U.S. production.

Mike McGlone's commodity report

Michael McGlone's Commodity Perspective is out. Mike is the commodity director at Standard & Poors.

I'm hooked on this concise monthly report, because it:

• Illustrates changes in subindices and individual assets that are driving (or deviating from) changes in the headline index;
• Connects fundamentals to total returns;
• Explains asset interconnections;
  
• Reviews theories as to what's going on and why.

You need to read it right away when it comes out though. It's perishable.

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Ya se publicó el informe de Michael McGlone, Commodity Perspective. Mike es el director de commodities en Standard & Poors.

Estoy adicta a este informe mensual conciso, ya que:

• Ilustra cambios en subíndices y activos individuales que marcan la pauta (o se desvían) de los movimientos en el índice general;
  
• Conecta los fundamentales con los movimientos en los índices;
• Explica conexiones entre clases de activos;
  
• Repasa teorías acerca de qué sucede y por qué.

Recomiendo leer el informe cada mes tan pronto como salga. Es perecedero.

Fed: -75 bp; commodity prices will flatten

The Fed decision is out: -75 basis points to 2.25%.

Comments:

1. Dissent is up. Plosser and Fischer both voted for "less aggressive action." In the January 30 FOMC meeting, Fischer alone dissented, preferring "no change" in the monetary policy rate. On January 22, Mishkin was absent, thus didn't vote; those present voted unanimously.
   
2. FOMC members recognize accelerating inflation and upward shifting inflation expectations, but hold to their view that weak demand will pull inflation rates down.
   
3. In particular, they expect commodity prices to stabilize. They appear not to embrace Jeffrey Frankel's favorite explanation for rising commodity prices in times of recession--the current low level of real interest rates--given that their rate decision of today will contribute to it.
   
4. Nor do they seem to agree with former Fed Chair Alan Greenspan, who said in a recent interview about his own low interest rate policy, "You can't do that any more."
   

Frankel theory on high commodity prices

Jeffrey Frankel is Brad Setser's guest blogger for a few days. He's focussing on why commodity prices are up if the global economy has turned down. His answer? Real interest rates:

If strong economic growth is not the explanation for the large increases since 2001 in prices of virtually all mineral and agricultural commodities, then what is? One wouldn’t want to try to reduce commodity markets to a single factor, nor to claim proof of any theory by a single data point. Nevertheless, the developments of the last six months provided added support for a theory I have long favored: real interest rates are an important determinant of real commodity prices.

High interest rates reduce the demand for storable commodities, or increase the supply, through a variety of channels:
- by increasing the incentive for extraction today rather than tomorrow (think of the rates at which oil is pumped, gold mined, forests logged, or livestock herds culled)
- by decreasing firms’ desire to carry inventories (think of oil inventories held in tanks)
- by encouraging speculators to shift out of spot commodity contracts, and into treasury bills.

All three mechanisms work to reduce the market price of commodities, as happened when real interest rates where high in the early 1980s. A decrease in real interest rates has the opposite effect, lowering the cost of carrying inventories, and raising commodity prices, as happened in the 1970s, and again during 2001-2004. It’s the original “carry trade.”

Professor Frankel is cross-posting this material on his own blog too.

A commodity report that even I can understand

I wasn't sure how to start out. Should I justify myself somehow? I checked my friend Felix Salmon's first post on Condé Nast Portfolio.com. He just jumped in. I'm jumping.

I like good writing and I strive to understand commodity markets. So I was pleased to stumble upon a well written, pedagogical commodity market report: the Standard & Poor's Commodity Perspective - S&P CSCI. I read the January edition. It's obsolete by now but still helpful.

Author Michael McGlone assumes no expertise on our part. He tells us, for example, that livestock prices "generally have an inverse relationship with the primary feedstock, corn."

He's a big-picture analyst. He connects January commodity returns to the real economy, consumer price inflation, past returns, other asset markets, and ongoing analyst debates.

In his final paragraph, by directing our eyes to the past, he shows us the future:

In 1900, when the U.S. began to industrialize, per-capital annual oil consumption was about 1 barrel per person. By 1970, it was about 27. In 1950, Japan consumed about 1 barrel per person annually. By 1970, it was about 17. In 1965, South Korea consumed about the same 1 barrel per capital and by 2000, it was about 17. today, China and India consume just over 1 barrel of oil per person annually.