News

June 22, 2009

Commodities Markets Pause For Breath, As Black Holes Elsewhere Suck In Cash

By Rob Davies

All the multi-faceted impacts of unwinding the debt left over from the biggest credit bubble the world has ever seen still seem to make analysis of the future all but impossible. The rally in risk assets, like equities and commodities, stuttered to a halt last week. Part of the reason for the slowdown in equities were more demands for cash, and these were led by Rio Tinto with its request for US$15 billion to clear its balance sheet of the debt from the Alcan acquisition of two years ago. The Financial Times estimates that so far this year the UK stock market has been asked to stump up US$50 billion to bail out indebted companies and we haven’t even reached the halfway point yet.

Such a large black hole in the equity market, sucking in vast amounts of cash, is bound to have an impact on other asset classes. The attraction of buying new shares in Rio at £14 when they were trading at £30 a few weeks ago is easily enough to persuade the market to take profits from other assets, such as commodities, and redeploy them on favourable terms. One asset class that has already felt the heat is fixed income.

While most bonds are higher than they were last year, many are...