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After brief rise on German ruling, rally falters.

Summary: LONDON/NEW YORK - A four-day rally in commodity markets faltered on Wednesday, with signs of higher oil and grain supplies tempering optimism over a German court's approval of a euro zone bailout fund and expectations of more monetary easing from the Federal Reserve.

LONDON/NEW YORK - A four-day rally in commodity markets faltered on

Wednesday, with signs of higher oil and grain supplies tempering optimism over a German court's approval of a euro zone bailout fund and expectations of more monetary easing from the Federal Reserve.

While select markets such as platinum, aluminum and soybeans carried on rising, broader risk assets, including oil, gold and copper, pulled back from early session peaks to trade little changed on the day, with some traders pocketing recent gains that lifted prices to their highest in months.

Raw materials rose earlier in the day after the German court cleared the way for Germany to back the euro zone's new 700 billion euro European Stability Mechanism, boosting the bloc's ability to face up to its debt crisis.

"There is some 'buy the rumor, sell the fact' selling going on. The retreat in commodities is somewhat expected when you had a big momentum run into the news," said Sean McGillivray, head of asset allocation for Great Pacific Wealth Management in Oregon.

Now traders are positioning ahead of the Fed's two-day policy meeting that began on Wednesday, widely expected to approve a third dose of bond buying - or quantitative easing (QE) - to kick-start the economy, a stimulus that many expect to stoke further buying of commodities.

The meeting, which is also expected to extend the central bank's zero interest rate pledge to 2015, will end on Thursday. The result is expected to be released at 12:30 p.m. EST, while Chairman Ben Bernanke will hold a press briefing at 2:15 p.m.

"Once again the big question is QE or not," said Gabriel Garcin, a portfolio manager at Europanel Research & Alternative Asset Management in Paris, which invests in European hedge funds and CTAs.

"If they do, it could really push up prices. Then once again the drivers of commodity prices would shift from supply demand fundamentals to more risk-on, buy everything that are risky assets."

The Thomson Reuters-Jefferies CRB commodity index was up by less than 0.1 percent at midday on Wednesday, pausing after a four-day 2.1 percent rise took the index to its highest since March.

Stock markets and the euro also got a brief shot in the arm from the German court decision, but it proved fleeting. U.S. stock markets were marginally higher by midday, while the dollar index dipped 0.15 percent.

Grains split on USDA

Chicago grain markets registered a split decision on the monthly U.S. Agriculture Department crop report, with corn dropping more than 1.5 percent to $7.65-1/2 after the data suggested this summer's deep drought had done less damage than expected to corn stalks at the end of the growing season.

"At least initially looking at the headline numbers, it's going to take some of the fear of super short production out of this market," Jack Scoville, vice president of Price Futures Group, said about corn.

But soybean prices kicked 2.5 percent higher, pushing back toward a record high after a five-day slide. A smaller than expected production forecast and concerns that farmers might harvest fewer acres than the USDA estimates fueled gains.

Oil tempered by stock data

Brent crude for October delivery, which expires on Thursday, was up 39 cents at $115.79 by midday, paring gains after an early push to a one-month high of $116.67.

Early gains were driven both by the German decision and by news that the U.S. ambassador to Libya and three other embassy staff had been killed by militants in a rocket attack, reviving geopolitical risk in the OPEC producer.

But U.S. inventory data showing an unexpected nearly 2 million barrel rise in crude stockpiles last week - opposite to forecasts of a 2.6 million barrel decline - knocked the wind out of prices, already fading in line with other risk assets.

Metals ride up

Copper turned fractionally lower after a strong three-day run pushed prices above $8,000 a tonne for the first time since May, while aluminium clung to its ninth consecutive gain, both buoyed by QE hopes, as well as Chinese infrastructure spending that should pump up demand.

Gold, which has come back to life in recent weeks following a fourth-month range-bound spell, also pulled back from a six-month peak to trade at $1,731 an ounce, barely changed. Silver slumped by nearly 2 percent.

While many analysts anticipate further bullion gains as Fed action weighs on the dollar and stokes inflation, the focus for the day was on platinum, which jumped another 2.5 percent to a more than five-month high amid spreading unrest in South Africa, which controls around 80 percent of global output.

South African police said striking miners blockaded roads leading to shafts belonging to number one producer Anglo American Platinum Ltd. The price has risen by nearly 20 percent since a strike at number three producer Lonmin Plc turned violent last month.

"The situation is delicate, very politically sensitive. But we have to sit back and take a more neutral look at the market and say this is all sentiment driven," Societe Generale analyst Robin Bhar said. "It's debatable as to how much of a sustained rise this will be once the dust has settled." Prices at 12:27 p.m. EST (1627 GMT)

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Publication:Khaleej Times (Dubai, United Arab Emirates)
Date:Sep 12, 2012
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