Australian market conditions at the beginning of this week

The rout in commodity prices continues, driven by a strong dollar and a general move away from assets deemed too risky. A relatively modest rise of one per cent in the dollar last week was outweighed by a 6.5 per cent fall in the price of copper to US$6,570 a tonne.

So, even though the Aussie dollar fell by 2.5 per cent, producers in that country still saw a real fall in their domestic price. Other metals experienced similar declines. Aluminium dropped 3.5 per cent to US$2,051 a tonne, lead by 4.3 pre cent to US$2,000 a tonne, zinc by 3.4 per cent to US$2,082. Only nickel that managed a gain, and even that was modest, a mere 0.7 per cent increase to US$18,250 a tonne.

These falls gave back a lot of the ground that commodities have gained in recent months. Not only is copper now down 14 per cent on the year, but it is actually back to the level it was at in mid-October. The same argument goes for other asset classes that share the pro-growth attributes that metals do. The most notable downward moves have been visible on the stock markets on the southern fringe of the euro zone. The Athens market was marked down by 8.3 per cent, Spain’s fell by 7.7 per cent, and Portugal’s by 7.2 per cent.

This sudden about turn in the mood of capital markets has had one high profile casualty, so far. Man Group grew out of the ED&F Man sugar trading business to become one of the most powerful hedge funds in the business, with a flagship worth over US$20 billion.

The exact nature of Man’s investment process is a closely guarded secret, but it is known that the strategy is based around the futures markets with a significant exposure to commodities. In essence it seems that the complex algorithms are very good at following and extrapolating trends.

Or at least were. The last financial year, and especially the last few months, have not been kind to Man, which has suffered the double whammy of an underperforming fund and redemptions. Funds under management have now fallen from US$47 billion to US$42 billion, and this poor performance means that the fund cannot charge its lucrative performance fees.

As a consequence its market value has fallen from £5 billion to £3.7 billion, and its current yield is over 12 per cent. For anybody seeking a cheap and highly geared way to play the commodity markets Man Group must be an interesting opportunity. Provided of course it can get its computers to work out which trend it should be following.

That of course is the nub of the problem for everyone following the commodity markets. The trend is your friend until the bend at the end.

Last year was an exceptional period for commodities, and China seemed to be the only game in town. While that story has not gone away, it is being pushed into second place by the other cross currents in world capital markets.

Now, there is real concern over the eurozone, and the dollar, despite all its problems, is deemed to be a much safer place to be. Perhaps the oddest development last week was the weakness in the gold price. Gold’s fall of 2.3 per cent was due to more than the rise in the dollar. If traders buy gold when they are worried about the dollar why do they buy dollars when they are concerned about the euro? Perhaps someone at Man Group is working on that.

Source:minesite

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