Miners and oil majors lead drop

A sharp jump in Fed funds futures overnight stoked selling by traders, as increased expectations for US rate hikes raise the risk of further strength in the value of the US dollar and could potentially weigh on industrial demand for raw materials.

Traders had expected that the minutes of US rate-setters last policy meeting, published on Wednesday evening, would be considerably more dovish.

In the event, more central bankers than had been thought said they preferred to leave the door open to the possibility of an interest rate hike when they next convened on 15 June.

That saw Brent crude oil futures slide by another 0.8% to close at $48.37 per barrel on the ICE, albeit following a recent sharp run-up in prices, in turn lopping 2.53% off the DJ Stoxx 600 Oil&Gas sector gauge.

Predictably, shares in BP and Royal Dutch Shell were among the biggest drags on the Footsie on Thursday. The latter’s stock was also downgraded from a ‘buy’ to a ‘hold’ by analysts at Charles Stanley ahead of the outfit’s next Capital Markets Day.

However, by 19:43 BST Brent futures were only marginally lower, off by just 0.205% and well above their intra-session lows.

Helping to cushion the blow on oil prices, in a speech on Thursday afternoon Fed vice Chairman Stanley Fischer did not spring any unpleasant surprised on markets.

His peer at the head of the NY Fed, William Dudley, was arguably a tad more hawkish, explicitly holding out the possibility of a June hike, but not overly so.

Just as oil futures recovered so too the odds assigned by financial markets to a June move by the US monetary authority were also coming off the boil.

As of 19:43 BST Fed funds futures were assigning a 26.3% probability to such a scenario, after indicating as much as a 39% chance at one point in the previous session.

Fresnillo was the largest casualty among miners, as July 2016 silver futures in New York dropped by a hefty 3.66% to $16.51 per troy ounce, amid market-chatter that recent gains in prices had been overdone.

Three-month LME-traded copper futures were down by a relatively tame 0.7% to $4,585.00 per metric tonne by the closing bell.

Nonetheless, prices for iron ore with 62% content in Qingdao dropped like a ton of bricks once again, to end at $53.47 a dry tonne, according to Metal Bulletin.

Acting as a backdrop, Macquarie’s head of commodities research, Colin Hamilton, told clients in a research note that: “In the near term, we are highly cautious across all almost all commodities as headwinds return. In particular, steel and raw material prices are likely to feel downward pressure as the Chinese cycle turns.”

Looking out to the second half of 2016 Hamilton said he and his team expected price gains in nickel and zinc and that gold and silver would “outperform market expectations over the coming years.”