WSJ:Commodities Slide As Recession Fears Take Their Toll
Of DOW JONES NEWSWIRES
LONDON (Dow Jones)--Commodities are sliding steadily lower Friday in the worst pan-asset class sell-off since October 2008, as fear of another severe downturn tightens its grip on the financial markets.
Sentiment is deteriorating further following the plunge in equities that started Thursday and dragged other assets classes like commodities lower. Traders said the world is waking up to the reality that the eurozone debt problems aren't going away, and that the U.S. is struggling to keep itself from drifting into a recession.
Market participants will be closely watching the U.S. July nonfarm payroll data, due to be released later Friday, for signs of the world's largest economy is slipping into recession.
Copper, oil and wheat are slumping as investors intensify their risk-averse attitude and seek safer bets such as the Japanese Yen, the Swiss franc, and U.S. government bonds.
Given its close link to economic growth, Nymex crude oil futures are showing the worst decline of the commodities sector, falling 4% in Asian trade overnight. At 0844 GMT, front month September crude trading on the New York Mercantile Exchange was trading down $1.28, or 1.5% lower, at $85.35 a barrel. Copper is down 1.8% at $9,185 a metric ton, while wheat for September delivery on the Chicago Board of Trade slipped 4% to $6.81 3/4 a bushel.
Even gold, a precious metal which traditionally benefits at times of uncertainty, is down from its recent record highs as investors scramble to find cash to cover margin calls in other financial markets. Talk of potentially increased margins in Comex gold futures, because of the rise in volatility, is also encouraging investors to reduce exposure to the precious metal.
A CME spokesman said the margins weren't adjusted Thursday, and that adjustments based on volatility, not price, are routine in CME Group markets.
Spot gold is trading at $1,668.80 a troy ounce, -0.2% from Friday's record high of $1,682.14/oz and recovering from an earlier decline of 2.3%, to $1,641.80/oz.
The weakness in commodity prices isn't a surprise, traders and brokers said, with many having been anticipating a selloff of the asset class from its lofty highs for some time.
On the one hand, if even the debt of the U.S. government is no longer considered risk-free, it makes perfect sense for investors to increase their holdings of tangible assets whose value is a lot less dependent on the creditworthiness of any government or financial institution.
But while this is a compelling argument in favor of gold, it makes much less sense for other commodities. Market participants note that oil and copper have much lower value to volume ratios and are harder to store, and that demand for industrial commodities is much more dependent on the underlying levels of economic activity.
Mining stocks are being dumped along with other equities such as technology and chemicals, with Eurasian Natural Resources Corp. PLC (ENRC.LN) showing the biggest decline, off 7.2% from Thursday's close. Steelmakers are softer, with Germany's Salzgitter AG (SZG.XE) down 4.1%, the worst hit of Europe's steel majors.
Similarly, oil equities are getting hammered, with London-based energy group BG Group PLC (BRGYY, BG.LN) the worst performer and down 3.1%.
The FTSE 350 basic resources index, including oil and mining, is currently down 2.7% from Thursday's close.
By Andrea Hotter, Dow Jones Newswires; +44 (0)20 7842 9413; andrea.hotter@dowjones.com
