Risk assets focus on Fed after G20 nod

By Amanda Cooper and Barbara Lewis

LONDON (BestGrowthStock) – Copper and other growth-linked commodities are likely to stay focused on future U.S. policy easing as a driver, although the G20’s hardened stance toward exchange rates could help unsettle an amply-supplied oil market.

The Group of 20 major economies agreed on Saturday to shun competitive currency devaluations, but stopped short of setting targets to reduce trade imbalances that are clouding global growth prospects. Their meeting yielded no major policy initiative and nothing close to the grand bargain in which participants would agree to allow their currencies to appreciate that some market watchers were looking for.

“There’s some token partnership in working together, but there’s nothing formal that’s going to change the amount of liquidity,” said Patrick Armstrong of London-based Armstrong Investment Managers.

“The same forces that have been driving commodities up over recent months will remain and countries will continue with short-term thinking about trying to give themselves competitive advantages.”

For the commodities complex, much will depend on how the outcome of the G20 is viewed by the foreign exchange market (Read more about international currency trading. )s.

The possibility of an all-out currency war that could, in turn, have triggered greater protectionism and further weighed on global growth, has been lessened for now, analysts said. That could embolden investors to take on more risk at the expense of perceived safe havens such as gold.

QE2 IN FOCUS

But the prospect of mass-scale bond purchases that most expect the U.S. Federal Reserve to detail at its next policy meeting on November 2 and 3 is widely expected to prove a more powerful force for the markets.

“There are fundamentals of supply and demand in various of these base metals, but what’s really driving the markets these days is what the dollar is doing,” said Gary Mead, an analyst with Virtual Metals.

“I’m afraid I take a rather dim view of these meetings anyway. I think they are generally quite promising … and then don’t translate into any hard action,” he said. “Everybody expects … the U.S. to do its second round of quantitative easing, so the question is to what extent that expectation is going to drive things, much more than what the G20 says.”

Gold is around 4.5 percent below the record high struck at $1,387.10 an ounce on October 14 after the U.S. dollar rose last week for the first time in five weeks. (FRX/: )

Yet the price is still on track for a 21 percent gain this year, largely as a result of investor concern over the European sovereign debt crisis, slowing U.S. growth and the risk of China’s economy (Read more about the fastest growing economy.) overheating.

Gold ended last week with a 2.3 percent loss, marking its first week of decline since early August as the strength in the dollar eroded investor appetite for non-yielding assets and other dollar-priced commodities. Virtual Metals’ Mead said copper could build on Friday’s gains, supported by evidence of demand continuing to outpace supply. This tighter fundamental backdrop coupled with weakness in the dollar has pushed London Metal Exchange copper futures to their highest in over two years.

Three-months LME copper futures ended last week with a 0.8 percent loss at $8,334 a tonne.

NOD TO EMERGING POWER

At the meeting in South Korea, G20 finance ministers recognized the quickening shift in economic power away from Western nations by inking a surprise deal to give emerging nations a bigger voice in the International Monetary Fund.

Raw materials such as copper and oil depend heavily on demand from emerging economies, and in particular China, the world’s top consumer of a number of commodities.

“There was not that much expected out of it. There was always a risk of it bringing a surprise and they managed to provide a surprise with the IMF (two seats),” said analyst Olivier Jakob of Petromatrix.

“That’s a surprise, but it does not really do anything to trading the dollar next week,” he said, adding: “Oil market supply and demand are relatively well-balanced. It’s going to be difficult for crude oil to move higher if there is not continued support from the correlation with the dollar.”

Plentiful supplies of crude have moderated the impact of expected quantitative easing on oil and that leaves it particularly vulnerable to any strengthening in the dollar — the main currency of commodity trade, which when weak makes raw materials cheaper for non-dollar buyers.

“I would not be surprised to see the oil price falling below $80,” said analyst Eugen Weinberg of Commerzbank.

“Profit-taking on a back of the devaluation war, which was one of the strongest drivers behind the recent price spike, being postponed would not be surprising.”

International benchmark U.S. crude oil has traded in a mostly $70-$85 range all year. It began rising toward the top of that range in September and this month hit five-month highs above $84 a barrel. It ended last week just below $82 a barrel.

(Editing by David Cowell)

Risk assets focus on Fed after G20 nod