Ravindra Rao, VP – Head Commodity Research at Kotak Securities
Commodities witnessed a sharp fall this week as the risk sentiment weakened amid rising virus cases, concerns about health of Chinese economy, increasing debate about Fed’s monetary tightening and heightened geopolitical tensions.
After days of rangebound movement, crude oil slumped to 3-month high as market players assessed slowing demand in wake of Organization of the Petroleum Exporting Countries’ (OPEC) stance to raise output gradually. Copper slumped below the key $9,000 per tonne levels for the first time since April. Gold resumed its safe haven status and managed to hold firm amid increasing global uncertainty however strength in US dollar kept prices below the key $1800 per troy ounce level.
The US dollar index jumped to November 2020 high this week on safe haven buying and increased expectations of Fed’s monetary tightening which more than offset mixed US economic numbers.
In last few weeks, equity markets especially US and European held firm as market players played down virus risks and focused on growth expectations. Equity markets however showed some signs of weakness this week and this further pressurized commodities. US Dow Jones index hit a record high level on Monday this week but has corrected over 2 percent since then. Chinese equities slumped to over two week low this week.
While virus cases have been rising for last few days, market reaction has intensified as rising cases has forced countries to impose tighter restrictions hampering economic activity.
Concerns about Chinese economy are high amid rising virus cases, disappointing economic readings and concerns about investor outflows amid increasing regulatory measures.
Fed’s monetary policy has been a topic of discussion ever since Fed officials projected possibility of early rate hikes. Mixed economic data and mixed comments from Fed officials clouded outlook for Fed’s monetary policy however market concerns about Fed’s tightening intensified post FOMC minutes this week. FOMC minutes showed that Fed officials think that the criteria to start tapering of bond purchases could be met this year. Fed officials are tilting towards starting the tapering process however the central bank may not rush to tighten policy soon amid persisting virus risks both to US and the global economy.
Risk sentiment has also been impacted by development relating to Afghanistan. The forceful takeover of Afghanistan by Taliban fighters has created an environment of uncertainty and market players want to see how other countries respond to it. A divide amongst world leaders who support Taliban and those who not may not bode well for market risk appetite.
With increasing demand concerns and global uncertainty, commodities may struggle to resume the upward momentum seen for last few months. Market players may continue to look at US economic numbers and Fed comments to gauge how quickly Fed may start tightening its monetary policy. The next major event is Jackson Hole Symposium on August 26-28, where Fed Chairman Jerome Powell may give more clarity about timeline to start the tapering process.
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