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Spring fever

Events surrounding the price of black gold are far more exciting than Brown’s political Budget, says Brian Tora.

Faced with the choice of commenting on what is likely to be the last Budget before a general election or some other topic of recent financial concern, I confess I find almost any other subject more exciting than the Government’s finances. Budgets, it is true, can and do affect market trends.

Arguably, we are still living with the aftermath of the abolition of advance corporation tax, back when this administration first started. But budgets these days are boring events, with measures often well signalled and financial engineering built into a lengthy timeframe.

The performance of commodity markets, on the other hand, is a topic for more immediate concern. Last week saw figures from new FTSE 100 constituent Antofagasta, a company which has been around for as long as I can remember. The surge in profits had all to do with the rise in the copper price, which again shows how world demand for raw materials is being driven by the expansion of Far Eastern economies, most notably China, and there is no sign that this is slowing.

This demand is, of course, behind the recent surge in the oil price. Few now expect black gold to fall back to below $30 a barrel, yet there is much less concern that this will have dire consequences for world economic growth than used to be the case. Of course, it would be foolish to expect inflation to remain unmoved by dearer energy and fuel costs. But no one is expecting a return to the bad old days of double-digit rises in the cost of living. Part of this, of course, is down to the industrial expansion taking place in China. The availability of cheap manufacturing processes has ensured that pricing power is still difficult to achieve. The development of a full-blown consumer society in the populous nations of South-east Asia would, of course, result in a different picture being painted. That is some years off yet, though.

The effect this is having on the structure of our own headline share index is interesting. BP is nudging 10 per cent of the value of the FTSE index as a whole, demonstrating that a rise in oil price does bring its benefits in some quarters. It is not just the oil sector which looks different in the index. We have a number of mining companies building a significant sector of their own. Interestingly, this turns the clock back 100 years or so to when many of the biggest companies in which you could invest in this country were those involved in the business of mineral extraction. Demand was high as a consequence of the rapid industrialisation of the Western world. It all goes to show that little changes over time.

Despite all this good news for holders of commodity funds, the market has been somewhat lacklustre of late. True, we have continued to flirt with the 5,000-level on the FTSE 100 but making further progress beyond this has proved difficult. Perhaps it is no more than the uncertainty created by the likelihood of an election. Certainly, this is one event which could well impinge upon the way the market behaves.

The last time Chancellor Gordon Brown announced a Budget ahead of an election, it was in the knowledge that his war chest was full and the ability to dish out largesse to persuade voters was evident. Not so this time as last week’s statement made clear. Given the problems on the political front which have been besieging the Government, the possibility that its massive majority may be overturned is looking ever more likely. It was a political Budget last week. But the commodity story remains more exciting.


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