Commodities drive TSX higher

Higher oil and gold prices helped the Toronto Stock Exchange post a strong advance Monday, building on gains made during last week's wild swings on global markets.

The S&P/TSX composite index closed up 141.41 points, or 1.13 per cent, at 12,683.61. The heavily-weighted energy sector rose 1.5 per cent on the strength of higher oil prices. September oil gained $2.50 to close at $87.88 US a barrel on the New York Mercantile Exchange.

The TSX financial index was 1.0 per cent higher.

Golds advanced as bullion futures surged $15.20 US an ounce to $1,755.50 an ounce.

In New York, the Dow Jones Industrial Average ran ahead 213.88 points, or 1.90 per cent, to 11,482.90, erasing all of its losses since the Standard and Poor's downgrade of the U.S. credit rating on Aug. 5. But the S&P/TSX is still down two per cent since the end of July and the Dow is 5.4 per cent below its level then.

The Canadian dollar added 1.11 cents to 102.05 cents US.

Several large corporate deals helped to increase investor confidence.

Early Monday morning, TD Bank announced it would purchase the Canadian credit card business of MBNA Canada from Bank of America Corp., which has about $8.5 billion in receivables .

TD said the price included a "modest premium" of about $100 million on top of the value of MBNA Canada's $8.5 billion of credit card receivables.

S&P/TSX composite index 1-month chart

Google announced plans to acquire wireless phone maker Motorola Mobility for $12.5 billion US.

As well, Time Warner Cable Inc. said it will pay $3 billion in cash for Insight Communications Co., which has more than 750,000 cable customers in the U.S. Midwest.

In the energy industry, offshore driller Transocean Ltd. said it will buy Aker Drilling of Norway for $1.43 billion in cash.

Companies across the United States have a record amount of cash that they have accumulated since the recession ended. They have increased their cash reserves every quarter for more than two years, and businesses in the S&P 500 index had a total of $963.3 billion US at the end of March, according to the most recent data from Standard & Poor's.

"A calmer tone has settled over the markets after last week's turmoil," said Jane Foley, an analyst at Rabobank International.

Bargain hunters continued to buy after last week's rout picked up speed as worries grew about Spain, Italy and France getting caught up in the European debt crisis and amid fears that the U.S. economy would slide back into recession.

"You might have these moments of quiet, but the debt crisis in Europe did not go away," said John Hailer, chief executive for the U.S. and Asia of Natixis Global Asset Management.

"Our issues with the debt, with what our tax policy is going to be going forward, our unemployment did not go away."

"We are probably going to have to look at some very different levels of volatility than what a lot of investors grew up with over the last 25 to 30 years," he said.

European markets were positive with London's FTSE closing up 0.6 per cent, France's CAC ahead 0.8 per cent and Germany's DAX up 0.4 per cent.

Europe's debt crisis will also be in the spotlight this week, particularly on Tuesday when French leader Nicolas Sarkozy and German Chancellor Angela Merkel meet, and second-quarter euro zone growth figures are published.

"The Franco-German summit on Tuesday in Paris will be a major focus for financial markets this week, especially coming so shortly after what has been a very tumultuous week for France in financial markets," said Jan Dubsky, euro area economist at the Royal Bank of Scotland.

Of particular interest will be what the two leaders say about the viability of a eurobond as a potential solution to Europe's debt crisis, which has already seen three euro zone countries get bailed out. With a eurobond, the 17 countries that use the euro would jointly issue debt.

In Asia, stock markets rose Monday as data showed the economy of earthquake-battered Japan shrank at an annualized rate of 1.3 per cent in the April-June quarter, much better than the 2.6 per cent many economists had forecast.

Japan's Nikkei 225 index closed up 1.4 per cent at 9,086.41 while Hong Kong's Hang Seng index shot up 3.3 per cent to 20,260.10.

With files from the Canadian Press and The Associated Press Back to accessibility links

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'QE3' Would Be The 'Most Bullish Factor' For Commodities -- Panel

Jul. 13 2011 - 1:19 pm | 97 views | 0 recommendations |

Chicago (Kitco News) - If the Federal Reserve can provide additional stimulus to the U.S. economy, it would give the biggest price support to commodities for the rest of the year as investors again will seek to snap up hard assets.

“If we had, as I call it ‘QE3D’ – since every movie now is in 3D – then prices for commodities will soar again. It would be the most bullish factor,” said Phil Flynn, energy analyst for PFG Best Research.

Fed Chairman Ben Bernanke said in front of the U.S. Congress on Wednesday that the Fed is examining several untested ways to promote growth in economic conditions crumble.

This comes on the heels of minutes from the June Federal Open Market Committee released late Tuesday that showed some members would be in favor of additional stimulus if the economy faltered.

The combination of those two comments sent gold prices to record levels and triggered a substantial rally in the stock market on Wednesday.

Flynn spoke as part of a panel at Dow Jones Indexes’ Mid-Year Commodity Review and Outlook here.   

When the Fed’s second quantitative easing program ended in June, it coincided with the drop in commodity prices across the board, and Flynn said without any addition stimulus prices would retreat. He said without a third stimulus program and with the outlook for global demand slowing into the fourth quarter, crude oil prices could be around $85 a barrel. “If they do a QE3, then that’s wildly bullish. Instead of $85 we could see $110-$120 oil. That would also have a significant impact on heating and gasoline,” he said.

August contract crude oil prices on the New York Mercantile Exchange were trading around $98.62 a barrel on Wednesday.

On a side note, he said the riots in some Middle Eastern countries, known as the Arab Spring, have had an impact on gasoline prices. The price spread between Brent crude oil, the European benchmark and West Texas Intermediate crude oil, the U.S. benchmark, widened sharply because of the loss of Libyan crude oil production. Because of that sharp price difference, the release of crude oil reserves by the International Energy Administration was the right move, he said.

“There was real tightness of light, sweet crude supply in Europe. The reserves are there for a time of war and there is war,” Flynn said.

Commodity Index Down Slightly On Year

The Dow Jones-UBS Commodity Index is down 2.62% for the first half of the year, said John Prestbo, editor and executive director of the Dow Jones Indexes. Precious metals were the best-performing sector within the index, gaining 6.82%, while grains were the worst-performing sector, sliding 9.72%, he said. For comparison, the Dow Jones Industrial Average stock market index is up 6.37% for the first six months of 2011.

Prestbo noted that investors are continuing to put money in the commodities market, with $76.9 billion tracking the DJ-UBS Commodity Index, up from $62 billion as of Dec. 31.

John Kowalik, an executive director with UBS’ Commodities Investor Group, said money managers are offering commodities as inflation protection for their investor clients, rather than simply a stand-alone part of their portfolio.

“Commodity investing (has) … become an important component of new-investment strategies such as inflation protection and absolute-return products. In addition to pure index-based investing, investors and investment managers continue to seek improved returns through the use of enhanced index strategies, such as forward indexes, and by using commodity subindexes to modify their portfolios’ risk exposure,” he said.

He also said institutional investors are taking a “slow and steady” view of commodity investing and are not reacting to volatile day-to-day market action.
There has been a lot of discussion about “excessive speculation” but neither Kowalik nor Flynn said they have seen it.

Comments about excessive speculation come around when “markets don’t do what (people) want them to do,” Flynn said.

He said the rise in commodities prices is a side-effect of the loose monetary policy. “The government and the Fed don’t want to admit it has an effect on prices. They say they kept the markets from crashing, but they don’t want to say what it did to the dollar and how it raised commodity prices,” he said.

OUTLOOK FOR OTHER MARKETS

The outlook for metals will continue to be based on the global economic uncertainty, said Patricia Cauley, director, metals products at CME Group.

“The flight to safety continues as investors maintain interest in gold and dual-purpose metals platinum and silver in response to Europe’s debt crisis and slowing global economic growth. On the industrial side, continued uncertainty in global growth could result in additional volatility in copper and steel,” she said.

She added that the CME Group does not give out price forecasts for metals “and does not mind if prices go up or down” as that means bigger volume.

Jack Scoville, vice president, Price Futures Group, said the grain markets will remain very volatile for the next few months as weather extremes could sharply skew the yields for corn and soybeans.

The cool, wet spring in the Midwest delayed planting of the corn and soybean crops and that means pollination of these two crops is happening later in the summer. Hot weather can hamper pollination which can reduce the plant’s yield.

If the corn crop sees normal weather, then yields can still be good. Prices could fall, with a harvest low of $5.50 based on the nearby futures contract, although $4.50 would not be out of the question. However, if the weather turns dry or if the droughts in the U.S. south move further north prices in “the upper $7s or even as high as $8.50-$8.75 are not out of the question.”

Chicago Board of Trade December corn futures were trading around $6.76 a bushel on Wednesday.

Scoville forecast soybean prices around $13.50 a bushel as supply from Brazil remains ample. A solid harvest could push prices lower, to the $10 region. CBOT November soybeans were trading around $13.76 a bushel Wednesday.

Wheat prices are under pressure as Russia resumes exporting the grain following a rebound in production after last year’s devastating harvest.

Overall, though, prices should find support. ““Prices for grains will remain extremely volatile, but should hold to high levels overall as demand stays strong from developing countries and as production potential in the U.S. and abroad remains uncertain due to weather extremes,” Scoville said.

By Debbie Carlson of Kitco News dcarlson@kitco.com

http://www.kitco.com/

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