Industrial commodities fall on Fed's stimulus pullback signals

Metals take a hard knock on Fed move

Industrial commodities declined amid panic selling today, after US Federal Reserve Chairman Ben Bernanke hinted at an early withdrawal of its bond buying programme. Weak factory data in China, the world's largest consumer of base metals, contributed to the decline.

While copper fell 2.3 per cent to a seven-week low of $6802.75 a tonne in early trade on the London Metal Exchange (LME), aluminium fell 2.1 per cent to $1796 a tonne, the lowest in about three and a half years. Crude oil plunged 3.2 per cent to $96 a barrel; nickel dropped to a four-year low.

With the rupee falling to a record low, the decline in global commodities was capped on Indian bourses. For instance, against the 2.1 per cent decline in aluminium prices on LME, the metal fell just 0.3 per cent in the Indian market. Similarly, lead fell 2.7 per cent on LME, against a mere one per cent fall on the Multi Commodity Exchange.

Following Bernanke's announcement, fears excess liquidity would be withdrawn from markets and this would have an impact on global economy led to sharp selling across risky asset classes. In China, which accounts for about 40 per cent of the world's industrial metal output, industrial activity slumped to a nine-month low, which heightened risks of a sharper second quarter slowdown.

"The pullback is sure to begin, but at a leisurely and steady pace, as the impact of an immediate withdrawal could lead to havoc in the world economy and financial markets. It is not only the quantum of the injected stimulus package, but also its duration that has made world markets dependent on such aggressive measures by central bankers. The bullish trend seen in some major commodities due to this monetary stimulus has been phenomenal and suggests a reversal could be seen in commodity price trends, when the pullback actually begins," said Reena Rohit, chief manager (non-agri commodities), Angel Commodities Broking.

Now, the US Fed is confident about growth and this has brought about the sentiment that improved economic activity would lead to removal of liquidity that boosted asset classes. However, Bernanke also said Fed could stop reducing its bond purchases or raise it if the job market didn't stabilise.

"Mixed statements from the Fed have led to speculation on how soon it would start pulling back its bond-buying policies. Earlier, there wasn't a time frame as to when the quantitative easing would end. But now, it is clear once a 7.2 per cent unemployment rate is achieved, the Fed would start tapering its extensive policies. The Fed's bond-buying has largely supported commodities by lowering the value of the US dollar and making assets priced in the dollar cheaper for holders of other currencies," said Kishore Narne, associate director and head (commodity & currency), Motilal Oswal Commodity Broker.