INSIGHT: ECB bond-buying programme to lift commodity prices

07 September 2012 15:44  [Source: ICIS news]

By Joseph Chang

NEW YORK (ICIS)--Finally we have some clarity on solving the eurozone debt crisis. European Central Bank (ECB) chief Mario Draghi gave a much-needed jolt to the financial markets with a bold plan to buy unlimited amounts of sovereign debt of struggling eurozone countries to lower borrowing rates.

The fact Draghi said the ECB will “engage in outright monetary transactions” to buy short-term debt of one-to-three years in maturity in unlimited amounts means that short-term borrowing rates will fall. Governments will still have to request this help through established rescue funds which will come with conditions.

It is monetary easing, but fiscal austerity. After all, governments still need to slash bloated debt levels, and this will be a long road ahead.

The plan is in effect quantitative easing (QE) – printing money. And as such, expect this flood of liquidity to lift commodity prices worldwide. Not only does this inject confidence into markets that Europe is on the path to recovery, but also bundles of currency into the financial markets.

Stock markets worldwide rallied strongly on the announcement, along with crude oil, which is once again approaching the $100/bbl (€79/bbl) mark on the NYMEX (New York Mercantile Exchange).

Look for this to boost commodity chemical prices in the near and medium term as the anticipation of greater liquidity provides the spark, and the actual flood of currency fuels the fire of higher prices.

The September ICIS Petrochemical Index (IPEX) rebounded 2.6% from the year-low in August to 307.77, driven mainly by an almost 10% gain in Europe. The US component edged up by 1.6%, while Asia experienced stagnant growth. Out of the sub-indices, olefins gained the most by 5.7%, followed by aromatics at 5.2% and then polymers at 3.9%.

The ECB move could help extend these gains in the coming months.

Next up is the US Federal Reserve meeting from 12-13 September. Expect Fed chairman Ben Bernanke to announce QE3 or another form of monetary easing as it seeks to meet its dual mandate of keeping unemployment and inflation in check. US inflation remains low while unemployment is historically high at 8.1%.

As of the latest figures in July, the US Consumer Price Index for the past 12 months was up only 1.4% – the smallest gain since November 2010. The core CPI, excluding volatile food and energy prices, was up 2.1% in the same 12-month period, the smallest increase since October 2011.

China’s economy is also struggling with leading economic indicators signalling contraction in the manufacturing sector. Its central bank is also leaning towards more accommodative monetary policy.

With all three major central banks on board with the policy of easy money to fight the economic slowdown, there’s only one way for commodity prices to go. Gentlemen, start your buying!

Additional reporting by Asfar Hussain in London

($1 = €0.79)

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By: Joseph Chang
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