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Commodity bull run hangs on US economy
Lucas de Lange
Posted: Mon, 22 Oct 2007
[miningmx.com] -- COMMODITY shares are responsible for the JSE being so strong. And the question now being asked is whether that trend can continue, given the marked slowing in economic growth in the United States.
In fact, there have been recent analyses predicting a recession - in other words, two successive quarters of negative growth. Not so long ago emerging economies (including South Africa) were regarded as very risky but now hope is being placed in them to carry the world through a difficult patch, which is apparently in the offing due to the cooling down in the US.
The question is whether the emerging markets will, in fact, succeed in this because, if not, a marked fall in world growth can be expected and that will affect commodity prices, which are so important for South Africa.
At the latest meeting of the G7 finance ministers in Washington, attention was given
not only to that issue but also to the weakening US dollar, which is creating problems for Europe.
The dollar recently weakened to more than US$1,40/1 euro for the first time, and both French President Nicolas Sarkozy and Italian Prime Minister Romano Prodi are warning that it will impact on Europe. A strong euro hampers Europe's exports to the US, which, because of slower growth, is becoming more
competitive.
The US dollar has been in a downward trend for years, though there was a relatively short-lived upswing in 2005. Since the beginning of last year, the dollar has lost more than 18% against the euro.
The weakening dollar clearly enjoyed attention at the G7 summit, since it has such an important effect on all concerned. One possible solution is for the European Central Bank to lower interest rates. However, bank president Jean-Claude Trichet indicates the best he can do is to maintain current levels.
On the US side the climate is against any rate increase. It in fact suits the US for the dollar to weaken in line with the economy. The problem is that the US is so dependent on overseas investments to finance its massive current account deficit.
There are already signs of displeasure among other countries at the prospect of a lower return on a currency that's losing value. For example, Saudi Arabia, the world's largest oil exporter,
didn't follow the US's rate cut and there's speculation that this important US investor will abandon the dollar peg.
It's as if the US has to choose between the devil and the deep blue sea: should it protect the dollar against a possible rout or should it try to protect the economy against a recession? Commentators leave no doubt that the US will follow the second route.
Therefore, it's being argued the world should prepare itself for substantial further weakening of the dollar.
As for emerging markets, the general feeling is that - with China in the lead - they can drag the world through its troubles. That explains why the MSCI emerging markets equity index currently stands at a record level. It's been said that the world's dependence on the US has fallen so much that there will only be a limited cooling down.
It's pointed out that, for the first time in modern history, China will this year make a greater contribution to growth in international
GDP than the US. Admittedly, the buying power of American consumers is still about four times greater than that of China and India combined, but at the same time their consumers' capacity is growing rapidly.
That should, hopefully, help to some extent to neutralise the decline that people such as Greenspan foresee in the US.
In any event, what must be kept in mind is that Wall Street is still the world's leader. It's currently at a new high - despite the concern regarding the US economy expressed by experts such as Greenspan - but at the same time it should be noted that the S&P is reaching an overbought level, from which there were sharp corrections in the past. And that will also affect the JSE.
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