Bleak economic reports dampen investor sentiments in markets

Written by Tanushree Mazumdar | Updated: Oct 29 2011, 09:00am hrs
The Beige Book is one of the most awaited reports coming from the US Federal Reserve. As it is a commentary on the macroeconomic outlook of the US economy before the FOMC meeting on interest rates. In India the RBI comes out with the macroeconomic report just before any monetary policy announcement or review of the same. Last week, the September Beige Book was released. The Book reported a weak expansion of economic activity with business and consumer spending rising only marginally, not much pressure on wages and a low demand for credit. Global commodity markets received this report with some apprehension about the state of the economic recovery of the US and most commodity prices saw a sell-off during the week.

News from elsewhere (EU and China, mainly) was not particularly encouraging either. Germanys ZEW index of investor expectations showed its lowest reading since November 2008 tumbling to minus 48.3 in October from minus 43.3 in September, reflecting worries about weak domestic growth in Germany. It did not add much confidence to the state of resolution of Europes debt worries either. Data coming out of China was not very encouraging. The Chinese GDP grew by 9.1% in the third quarter from a year earlier which is the third consecutive quarter of slowdown after it grew by 9.5 in the second quarter and 9.7 in the first quarter.

Though the dollar depreciated against the Euro by 0.14% the effect of the macroeconomic reports from around the world outweighed the cheapening of the dollar.

The greatest fall was seen in the near-month copper futures which declined by 6% over the week. The two crude oil contracts in the energy complex also declined over the week with the benchmark near-month WTI crude oil contract declining by 0.09% to close at $ 87.40 per barrel by the end of the week and the Brent crude contract declining more sharply by 2.57% to close at $ 109.56 per barrel after opening at $ 112.46 per barrel at the beginning of the week.

Though the markets reacted to the weak macroeconomic data with a sell-off in the key commodities, their perception of riskiness was not very high as gold futures did not see much safe haven buying and instead fell by 2.83% over the week, closing at $1636.1 per pound after having opened at $ 1683.8 per pound at the beginning of the week. Silver futures fell by 3.19%.

New York cotton futures closed the week with 4.8% loss as investors turned bearish on fibre demand amid dragging euro zone woes and signs of weakening global economy pushing the contract to 14 month low on Thursday.

Uncertainty over US winter wheat caused the CBOT wheat futures to climb 1.44% during the week while buoyant overseas demand for corn from the US as indicated by the USDA weekly report supported gains in corn futures. Sugar on ICE Futures US closed 5% lower last week as investors cut their bets on expected glut of supply outpacing demand for the first time in four years.

Futures on raw sugar has fallen more than 15% this year, moving towards the biggest drop since 2006. Global output is expected to exceed demand by as much as 6 million tonne.

In the domestic market, in the agricultural commodities, chana futures rose by 7.84% over the week to close at R3325 per quintal amidst reports of higher demand in the spot market in the on-going festival season.

Near-month guar seed futures moved sideways to decline by 0.36% over the week. Refined soya oil futures also moved sideways showing a decline of 0.97% over the week. Rape mustard seed futures rose by 4.91% over the week to close at R3032 per quintal as there were reports of lower arrivals in the mandis as well as higher demand in the physical market.

The author is senior economist, NCDEX. The views expressed are personal.(With inputs from Neha Sinha, Economist, NCDEX. )