Commodity market already discounted US Fed’s $600 billion programme
Moneylife Digital Team 04 November 2010

The commodity market, except the crude oil has already discounted the US Fed’s move to buyback the debt from banks and so far have remained flat.

Commodity prices are not likely to witness a great momentum in the long-term following the US Federal Reserve's (the Fed) $600-billion programme to buy debt from banks, which may weaken the dollar further, say analysts.

"The programme will certainly impact the US dollar negatively as the Fed's decision will increase liquidity of the greenback in the market. However, the market was fully aware about the Fed's action so the impact would not be very acute. And I don't think it will create a significant pressure on the dollar," said an analyst from a Mumbai-based research firm.

The Fed also announced that the $600 billion programme would be topped by around $250 billion of re-invested assets, mainly mortgages, from the quantitative easing.

"The market was expecting around $500 billion, but they have come up with $600 billion. They will also continue their re-invest programme, so total would be around $850-$900 billion," said the analyst.

In early trades on Thursday in London, base metals prices gained marginally. Copper for the three-month delivery gained 1.3% to $8,430 per metric tonne, while aluminium gained 0.9% to $2,439 per tonne on the London Metal Exchange (LME). Ony silver was up about 3% and zinc was up 2%.

"We have not seen a great impact of the Fed's announcement on commodities as of today and since tomorrow is the holiday in India, there is not much action in the market," said a senior analyst from Anand Rathi Financial Services Ltd.

"Fundamentals are still not good for commodities. Commodity prices are climbing just because of the depreciation of dollar and will go further, except agriculture commodities, which are still in a better place due to huge demand-supply mismatch situation," added the analyst. 

Analysts also feel that the package announced by the Fed would give some support to crude oil price.

"Crude oil prices indicate the global economic condition in a better way than metals. Since last two to three months, metal prices have recovered very fast. However, crude oil prices are not showing the same performance and are hovering between a broad range of $75-$85 per barrel. Unless the US economy shows some recovery, crude oil prices will not move up much. However the Fed package and China's action to build up its strategic petroleum reserves due to lower crude oil prices, is likely to support oil prices to gain some strength," said an analyst.

JP Morgan Chase & Co and Bank of America Merrill Lynch (BoAML) have also said that crude oil would rebound and may touch $100 a barrel in 2011 as the US economy strengthens its growth. 

"We are expecting maximum price of oil would be $90 per barrel," added the analyst from Anand Rathi Finance.

The analyst was also bullish on gold. He said, "Gold prices will increase due to the dollar factor and fears of inflation. I think it would be a win-win situation for gold." 

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