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***Can China keep pushing commodity prices higher?
***Why predicting the future is easy
***RECOMMENDED ARTICLES: The US economy is on borrowed time… Seven investment experts’ predictions for 2006…
Predicting the future isn’t that hard. It’s getting the timing right that’s the problem.
For example, many analysts were predicting before Christmas that another UK interest rate cut would arrive in February. But the Bank of England voted to hold the key rate at 4.5% earlier this month.
The analysts just shrugged their shoulders and concluded that another rate cut will arrive before May. But it looks like they could be wrong on that too.
According to minutes for February’s Monetary Policy Committee meeting, the only person voting for a cut was Professor Stephen Nickell. He’s voted to trim rates three times in a row now, so the fact that he’s yet to convert any fellow members suggests his arguments lack weight.
And judging by some of the comments in those minutes, anyone hoping for a cut could be waiting for some time…
One of the reasons behind the Bank of England’s reluctance to cut interest rates, ‘was some concern that a reduction in interest rates at this stage would provide further support to the housing market and consumption at a time when GDP growth was already strengthening’.
As bank governor Mervyn King keeps saying, his job is to keep inflation under control, not prop up consumer spending. And with more and more fools putting their money into buy-to-let property, another interest rate cut is the last thing the housing market needs. We wrote extensively about the buy-to-let bubble yesterday – you can read the piece here: Why the buy-to-let bubble is doomed to burst
And with energy prices set to soar later this year, the bank cannot take benign inflation for granted. Indeed, one of the main reasons that inflation has remained so low for so long is the flood of cheap consumer goods from China. The price of anything made in the UK, from a haircut to a council tax bill, has been soaring.
But China has also sent prices soaring in another area – the commodities sector. Mining giant Anglo-American picked out China as the main driver of its success in 2005. The group saw underlying earnings jump to $3.7bn, up 39% on the previous year. Its iron ore, coal and platinum units racked up record profits as prices soared and production geared up. The company has nearly $4bn worth of new mining projects lined up, and expects prices and demand to keep growing this year.
However, there’s a growing group of analysts taking the opposite view to Anglo. They believe that the boom in metals prices has entered bubble territory, and that the sector is set for a huge correction. But as we already said – predicting the future is easy, it’s just the timing that’s difficult.
There’s no doubt that metals prices will fall one day. But will it be tomorrow – or more like 20 years’ time? Will it be from current highs – or from levels ten times as high as they are now?
Here at MoneyWeek, we certainly remain bullish on the commodities sector. With China still growing at breakneck speed and the population’s rapid adaptation to city life, there are at least 1.3bn good reasons for demand for raw materials to keep growing.
You can read more on why MoneyWeek editor Merryn Somerset Webb believes metals prices have a long way to run yet, by clicking here: Why the fall in metals price is just a blip.
Turning to the stock markets…
The FTSE 100 gained 14 points to 5,872. The day’s takeover rumour was centred on investment group 3i which surged 6% to 970.5p on speculation it has recently rejected a £6bn bid. For a full market report, see: London market close.
Over in continental Europe, the Paris Cac 40 closed 49 points higher at 5,041, while the German Dax rose 61 to close at 5,862.
Across the Atlantic, US stocks made solid gains as core inflation data for January met analysts’ expectations of a 0.2% rise. The Dow Jones closed up 68 points at 11,137, while the S&P 500 rose 9 to 1,292. The tech-heavy Nasdaq climbed 20 points to 2,283.
In Asian trading hours, oil edged lower, trading at around $60.70 a barrel in New York. Brent crude was trading at around $58. Meanwhile, spot gold was trading at around $553 an ounce.
In Asian stock markets, the Nikkei 225 rose 314 points to 16,096. Exporters gained on hopes that US inflationary pressures will remain benign enough to allow the Federal Reserve to stop raising interest rates before too long.
And in the UK, British Gas owner Centrica has reported that profits rose 11% during 2005. A series of price hikes saw its share of the residential gas market fall to 54% from 57% the year before.
And our two recommended articles for today…
The US economy is on borrowed time
– The US economy is living on borrowed time – and borrowed money. Even if the Federal Reserve tries to avoid recession by cutting interest rates, foreign creditors will not ignore the soaring trade deficit forever, says Dr Hans Sennholz in The Daily Reckoning. To find out why the current trouble in the Middle East could spark off a dollar collapse, see: The US economy is on borrowed time
Seven experts’ predictions for 2006
– Just before Christmas, MoneyWeek had seven of the best investment experts we know round for dinner to find out what they thought 2006 held. You can read the ensuing conversation, and check up on how their predictions have held out so far, by clicking here: Seven experts’ predictions for 2006