Commodities face France downgrade heat

Written by feBureau | New Delhi | Updated: Nov 21 2012, 09:26am hrs
Key commodities remained under pressure on Tuesday as rating agency Moody's downgraded France, stoking fresh fears about a protracted Euro zone debt crisis and its damaging impact on raw material demand.

Brent crude, copper and gold slipped intraday as the move took the steam out of investor optimism, built up since Friday on a possible solution to the US fiscal cliff and China's expected aggressive pursuit of growth following a smooth leadership transition.

Moody's cut the French government bond rating by one notch from the highest level to "Aa1" and warned another downgrade of the euro zone's second-biggest economy was possible.

No significant announcement from China to drive growth since the change of guard earlier this month just added to uncertainties about the course of the global economy.

"This is exactly the kind of thing we can expect to see over the coming quarters a few headlines of good news that are then reversed by ongoing problems, particularly in Europe and the US," Reuters quoted Barclays analyst Gayle Berry as saying. "I think that until those (growth concerns) are tackled at the core, prices are always going to be vulnerable to the ebb and flow of headlines," she added.

Brent crude oil dropped 39 cents to $111.31 per barrel intraday as worries about supply disruption in West Asia following the Israel-Palestine conflict were outweighed by fresh concerns about the French economy. US crude, too, tumbled by 42 cents to $88.86 a barrel. Traders are eyeing fresh U.S. oil inventory data, to be released this week.

Gold stayed steady on Tuesday following its biggest one-day rise in two weeks on Monday, but concerns of a weak euro affecting the prices still remained. The precious metal has been tracking the rally of euro, which hit its highest in nearly two weeks on Monday.

Although spot gold gained 0.09% at $1,732.96 an ounce intraday, after rising by more than 1% on Monday, U.S. gold futures shed 0.06% at $1,733.30.

Three-month copper on the London Metal Exchange also lost 0.5% to $7,761 a tonne. The industrial metal, which tracks the health of the economy, closed at $7,803 on Monday after rising to its highest since November 2.

Monday's rally was aided by the data showing US home sales rose last month and an indicator of home builder sentiment hit a six-year high in November.

Moreover, copper stocks in top consumer China's bonded warehouses scaled a record high of over one million tonnes late last week and inventories are expected to rise by around 100,000 tonnes by the end of December, thanks to poor domestic demand. Huge stocks could cut China's import appetite and weigh on prices.

Inventories of aluminium, too, hit an all-time high of 5.17 million tonnes, as Chinese producers have kept churning out the metal despite the crisis.