Morning Market Comment - Rising food prices are problematic

The financial markets are once again feeding through to real markets and affecting real people around the globe.  When you have many prices spiking on commodity exchanges these are reflected in underlying prices as yesterday proved when the UN’s food price index hit a new record high.  The last time this happened there was social unrest and rioting within many developing countries as the high food prices simply became unaffordable.  We will see the same again as the money people have to spend on simple food stuffs not only depletes what little spending power they may have had, but people could be driven to a Zimbabwe style situation whereby they have to forage for food.

The recent pull back in many commodity prices so far this year will not be enough to stop underlying prices from rising and the biggest risk faced this year is a poor global harvest like we saw in 2010.  Supplies of soft commodities are very low so a bumper crop is needed and the current high prices should help investment in production and bring prices back to more normalised levels.  This is rather hopeful thinking and for the time being we will have to learn to get used to a more expensive cup of coffee, bowl of cereal or sandwich in future.

Risk assets bounced last on in yesterday’s session with gold oil and equities all rallying from their lows.  Markets started the day concerned about the spike in Portuguese bond yields following their sale, but the sale was fully purchased and later on the good US employment data, a mere prelude to tomorrow’s big NFP number, recovered the situation.

So the FTSE 100 (UKX) is flat this morning with the pick of the bunch being BP (LON:BP.) once again and miners also seeing some interest after a bit of profit taking recently.  Despite the negative headlines about BP’s failure to avoid the Gulf spill (all stuff we already know), the share price has enjoyed an exceptional start to the year  and is now back above £5, benefiting from firmer oil prices and bid speculatio 

Economic data to focus on this morning is the UK’s PMI service number which is expected to remain flat at 53.0, above the 50.0 level suggesting expansion in the sector.  Then there’s the weekly US jobless claims which have been improving in the last few months and even dipped below 400k, with today’s expected number to be bang on the figure.

The dollar is mixed this morning having seen a strong surge yesterday.  Against the yen and sterling it’s a little weaker and against the euro it’s a little stronger.  The euro seems to have become the dog again as EUR/USD trades at 1.3120 and EUR/GBP is at 0.8440.  For EUR/USD important downside levels are 1.3095, 1.3055 and then of course the major 1.3000 area.  There’s quite a bit of work to be had on the upside with resistance at 1.3250 and then 1.3290.

For USD/JPY the 80 area has seen a bounce in November and even though we didn’t get as low as that earlier this month, you could argue that the recent rally has formed a double bottom around the area.  So 83.40 and 83.75 to the upside are resistance and 82,25 should provide support if we get down there. The overall trend of the pair though is still downward and for there to be any sort of indication that it might be over we’d have to trade back above 87/88.

Gold and oil made back some of their losses yesterday with the precious metal back above 1375, just a couple of bucks weaker this morning and crude back above $90, flat so far in today’s trade.  The recent volatility in these two markets is a reminder of how exciting/dangerous it can be to trade them.

This market commentary was written by Angus Campbell, Head of Sales at London Capital Group and Capital Spreads (see Disclaimer below).