Bailout of Ireland should be positive for commodities, but…

Pressured by other eurozone countries including Portugal, Spain and Greece, which feared that a continued sell-off would also lead to higher funding costs for their own debt, Ireland’s finance minister declared this weekend that the country would ask the European Financial Stability Fund (EFSF) and the IMF for a bailout. In a radio interview, he stated that the volume of a credit would be less than 100bn euro, but some several 10bn euro. Earlier last week, the euro was still under pressure against the US dollar, however, after the meeting of EU finance ministers the euro stabilized as signs emerged the country might as for help to bailout its banking system. Thus, the official confirmation that Ireland seeks to get a credit facility from the EFSF and the IMF should lead to a further recovery of the Euro against the US Dollar.

In addition, the US dollar gained last week as some politicians of the Republican Party as well as some economists close to this party wrote open letters demanding the Fed to abandon QE2. However, at a speech given last Friday in Frankfurt, Germany, on invitation by the ECB, Ben Bernanke left no doubt that the Fed is going to implement QE2 as announced after the recent FOMC meeting. This should also contribute to a weaker US dollar, which would be helpful for commodities.

 The latest CFTC report on the “Commitment of Traders” showed that the large speculators reduced net long positions in metal futures traded on US exchanges. In addition, the total open interest declined considerably. The rumor, which was spread around at the end of the second week in November, that the Chinese central bank would hike interest rates has lead to a flight of investors out of commodities. Also the open interest of base metals traded at the LME declined according to data from the exchange. The development of metal prices, only silver and palladium gained in a weekly comparison, indicates that investors remained cautious and have not increased their risk appetite again. The statement of the Irish finance minister could lead to a strengthening of the euro, which would be positive. However, whether investors increase their risk appetite and buy metals again is probably also dependent on the developments in China. On Friday afternoon GMT, China announced another increase of the reserve requirements for banks. This is probably negative for base metals in the short term. In the medium-term, we remain positive for base metals, as we don’t expect a hard landing of the Chinese economy. Furthermore, we expect in line with the ICSG a supply deficit of copper next year. The launch of ETFs on base metals, in particular copper and aluminum are also supportive factors in the medium-term horizon.

In the short run, easing tensions at the periphery of the eurozone are likely to be positive for the euro and could lead to a rebound against the US dollar. This would be positive for metals. However, fears of a further tightening of monetary and credit policy in China could be negative. But China’s monetary policy should have a stronger impact on base than on precious metals. Therefore, precious metals might perform better than base metals and the outperformer of last week could also be the outperformer of the coming trading week.