US markets rapidly lost ground this afternoon, as risk appetite evaporated. Heavy losses in commodity prices combined with a lacklustre earnings update from Alcoa and a drop in economic optimism in the US.
The sell-off in commodities is something of a backhanded compliment to the power of Goldman Sachs, with a note from the bank once dubbed 'a vampire squid' sending investors into a paroxysm of selling of risky assets. Certainly last week's gains in commodities had been impressive, but the wholesale dumping of these assets may have been overdone. Markets were made more edgy by news of further tremors in Japan, and a drop in economic optimism meant that the bears were firmly in control this afternoon.
Commodities retreat
It has been a poor day for commodities, as the general 'risk-off' atmosphere continues and investors dump raw materials as quickly as they picked them up last week. Commodities such as Brent crude oil and silver rallied during the late morning in London, but fell back rapidly and continued to drop following the US market open. The main element behind the fall remains the Goldman Sachs note yesterday, with the bank observing that copper could be vulnerable to a slowing of demand from China as investors reduce their purchases as a result of the high prices.
Oil prices have also edged back as investors begin to worry about the impact of high prices on the global economy. The risks were highlighted by the International Energy Agency, which said that oil demand growth had slowed of late due to higher prices. However, it added that it was too soon to say whether the civil unrest in the Middle East had come to an end, and it kept its forecast for demand growth unchanged at 1.6%, or 1.4 million barrels per day.
Economic optimism falters
Optimism about the future of the American economy fell for the second month in a row, with the number of Americans saying that a recovery was continuing falling once more. The IBD/TIPP index dropped to 40.8 in March, from 43 a month earlier, showing that pessimism is now more prevalent. The figure is a 33-month low, with higher petrol prices blamed for the gloomier atmosphere. 70% of those surveyed said that they had been hurt by higher oil prices, up from 67% in February, and the higher cost of gasoline for cars could well put even more pressure on consumer spending.
US equities – Alcoa
By 3.30pm (London time), the Dow Jones was down 108.53 points (0.88%) to 12272.58 and the S&P 500 had lost 10.17 points (0.77%) to 1314.29.
Aluminium producer Alcoa reported a mixed set of results, with profits ahead of expectations but revenue lagging behind. Earnings for the first three months were 28 cents per share, ahead of the forecast 27 cents, but revenue failed to meet the expected $6.08 billion even though it was 22% higher compared to 2010, at $5.96 billion. Global aluminium demand is expected to grow by 12% during 2011, with growth driven by the aerospace and vehicle industries. Alcoa fell 4.5% to $16.98.
US trade gap narrows
A decline in both exports and imports for the US was recorded in February, with the national trade deficit shrinking in line with expectations. The trade gap stood at $45.8 billion, down from an upwardly-revised $47 billion in January. Exports for the month were $165.1 billion, down $2.4 billion, while imports fell $3.6 billion to $210.9 billion. The trade gap between the US and China narrowed, which comes ahead of a G20 meeting this week where US officials are expected to press China again to allow its currency to appreciate more rapidly.
UK afternoon trading – Punch Taverns, BG Group
The FTSE 100 moved further into the red during the afternoon, and by 3.30pm (London time) the leading index stood at 5973.05, a loss of 1.33%.
Punch Taverns, which will demerge into two separate entities later this year, slumped 6% to 74.8p following a drop in interim profits. Pre-tax profits for the half year to 5 March fell to £61 million, below expectations of £62 million, with exceptional charges of £465 million relating to its tenanted estate of pubs. The loss per share was 50.5p compared to earnings of 9.2p in the first half of 2010. The company said that it had managed to gain market share during the period but added that the consumer environment remained difficult.
There was further good news from BG Group, with the announcement that a test of its Guara Norte well off Brazil had yielded a flow of 6000 barrels per day. Potential production is estimated at 50,000 barrels per day. The company has enjoyed a good run of late, with productive discoveries announced off both Africa and Latin America. BG shares fell 2.7% to 1503p.
