SCOREBOARD: Hot commodities

Commodities rallied for a second day on the back of rising demand and positive unemployment numbers in the US.

Here we go again – commodities, people! This looks to be day two of what is a strong rally and I’ll be honest in stating I’m still at a loss as to why it's occurring now. Yes, commodities were oversold, but they’ve been oversold for a while. There is chatter, bits and pieces such as gasoline demand in the US picking up, but then last week it was supplies that fell... Sell!

Similarly, US jobless claims fell 15,000 or so to 339,000 in the week of April 19 – which is good, right? But then, maybe that’s too good and the Fed will pull back on QE – which is bad. Hahahahaha – I know, I know – I’m just kidding. They’re never going to do that.

Elsewhere, all the gold rout seemed to achieve was to attract the interest of central banks to buy, and the Bank of Korea said they’d be buying more, as did some funds. So there is stuff out there, but none of it is really a compelling and clear cut case to buy.

Whatever the reasons, gold was up another $40 last night to $1463, which brings the cumulative total from the low to $132 or thereabouts (just under half the loss through the rout). Silver then shot up more than 6 per cent, copper was 2.7 per cent higher and crude 2 per cent higher ($93.3).

As you can see, these are big moves and they stood in contrast to a more modest session on Wall Street (S&P500 up 0.4 per cent to 1585, the Dow was 26 points higher to 14702, while the Nasdaq rose 0.7 per cent to 3290). You can guess that materials were a key outperformer, although not energy stocks, which fell. Consumer goods and telcos also performed well.

Over in Europe the mood was a little more upbeat in Germany with the Dax nearly 1 per cent higher. The CaC in contrast was flat and the FTSE100 rose 0.2 per cent. The French index was probably weighed down by news that the number of unemployed has hit a record at 3.2 million, although the rate at 10.5 per cent was a little higher through the 1990s at 11-12 per cent.

In Spain, the unemployment rate hit a record of 27.2 per cent, which surpasses rates recorded through the 1990s of 20-24 per cent. The fear from people who like to print money and think debt can just keep rising forever is that these unemployment rates will spark social unrest and discord. But that overlooks history. The Spanish are used to unemployment, and in fact the low unemployment rates pre-financial crisis of 8-9 per cent were the anomaly. So for instance, in the 20 years to the year 2000, Spain’s unemployment rate averaged over 18 per cent. For 20 years!

While we’re on things European, there were some interesting developments regarding the European interest rate debate. The US and UK want the European Central Bank to slash rates and print money – much more money – and it is the expectation of many that the bank will cut again when it meets next week. Commentary from the bank has been more mixed on the matter though, and there has certainly been no clear signal they will cut – but they are open to it.

Anyway, German Chancellor Angela Merkel weighed into the discussion last night when she said Germany needed higher rates, not lower. Although she could appreciate that some other countries need lower rates.

Otherwise for the price action, in the forex space the commodity rally saw little action on the Australian dollar, which was actually a little weaker from 1630 AEST at 1.0291. The euro, having spiked up to 1.3090, was a touch weaker from 1630 AEST (40 pips) to 1.3002. The British pound was the big mover, up a big figure (just above) to 1.5431 after UK GDP figures were stronger than expected at 0.3 per cent compared to expectations of 0.1 per cent and after a fall of -0.3 per cent in Q4. Annually GDP is 0.6 per cent higher.

So that just leaves rates, and US Treasuries didn’t do much, they sold off (yields higher), but moves were small in the end. the 10-year sits at 1.711 per cent, the 5-year is at 0.71 per cent and the 2-year is at 0.23 per cent.

Looking at the day ahead, the SPI suggests our market will rise a further 0.3 per cent. There isn’t much otherwise, just Japanese inflation at 0930 AEST, followed by another meeting of the Bank of Japan. Tonight we get another estimate of US GDP, which is expected to rise to more than 3 per cent in Q1 from 0.4 per cent in Q4.

Have a great weekend…

Adam Carr is a leading market economist.

Follow @AdamCarrEcon on Twitter.

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