'As central banks globally stay committed to keep measures in place, huge liquidity inflow likely to support commodities'

With increasing challenges for the global economy, central banks have stepped up efforts to keep the recovery going.

November 07, 2020 / 12:05 PM IST

Commodities have been on a rollercoaster ride for the last few days as market players try to assess the impact of US elections. While the new administration may entail many policy changes in coming days, in the near term market players are trying to assess the impact of election on US fiscal stimulus.

While a new government is likely to work towards additional measures, a divided Congress could make it difficult to approve a major stimulus.

Apart from the US election, commodities are also mired by rising virus cases which has forced countries to impose stricter restrictions threatening economic activity and thereby the recovery seen in the last few months. Mixed economic data from major economies also highlights the uneven economic recovery.

With increasing challenges for the global economy, central banks have stepped up efforts to keep the recovery going. European central bank set the ball rolling last week after indicating that more measures are likely in the month of December dependent on economic forecasts.

Adding to it, Australian central bank cut interest rates to a record low of 0.1 percent and pledged to buy 100 billion Australian dollars in government bonds over the next six months. RBA is not looking at an additional cut but committed to not raising rates until inflation was back in its 2-3 percent target band, something not expected for at least three more years.

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Bank of England kept the benchmark interest rate unchanged at a record-low 0.1 percent but announced a bigger-than-expected quantitative easing to the tune of about 150 billion pounds.

BOE forecast the economy would shrink by 11 percent this year, worse than prior guidance of a 9.5 percent contraction. BOE may keep monetary policy loose amid weaker growth outlook and uncertainty relating to Brexit. However, there is still not much clarity if the central bank will consider negative interest rate.

Amid the latest, the US Federal Reserve kept interest rate and bond purchases unchanged in line with expectations but maintained that it will take all possible measures to support the economy. The Fed has been emphasizing the need for fiscal stimulus to boost economic recovery and the central bank may not take fresh measures unless there is more clarity in the fresh stimulus package.

Central banks have been taking measures to support economic activity. With increasing challenges in the form of resurgence of virus cases especially in Europe and some parts of the US, central banks have recommitted to keep measures in place. The huge liquidity inflow is likely to support all asset classes including commodities.

(Ravindra Rao is the VP - Head Commodity Research at Kotak Securities.)

Disclaimer: The views and investment tips expressed by investment expert on Moneycontrol.com are his own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
Ravindra Rao Ravindra V Rao is the Head - Commodity Research at Kotak Securities.
first published: Nov 7, 2020 12:05 pm

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