Central banks disappoint, directionless trade in commodities

The key event this week were the meetings of the US Federal Reserve, Bank of Japan and Bank of England but a lack of cues from them added to uncertainty in financial markets.

The US dollar index rose after the Fed meeting but failed to hold on to the gains as focus shifted to other central banks. US equity markets came under pressure after four days of gains as the central bank's dovish stance was trumped by increasing risks to the global economy.

The Fed kept monetary policy unchanged in line with expectations. The Fed also highlighted that interest rates may remain near current levels until at least 2023. The central bank was uncertain about the US economic outlook as virus spread continued to remain out of control.

The Fed largely maintained its stance but market players were disappointed as the central bank once again reemphasised on the need for additional fiscal stimulus to support the economy. The emphasis on fiscal policy indicates that the central bank has limited monetary policy tools and has set the bar high to use them. So the Fed is not considering any new measures and is looking for fresh fiscal stimulus while US policymakers are struggling to reach a consensus on a new package.

The Bank of England (BoE) expressed concerns about the economy amid Brexit uncertainty and rising viral cases. It also indicated it was looking at negative interest rates. BoE, however, kept interest rate and bond purchases unchanged and did not give clear cues about its next move.

The Bank of Japan (BoJ) also kept monetary policy unchanged and was more upbeat on the economy while maintaining that overall outlook remained rocky. BoJ, however, said it will work closely with the new administration under the leadership of Yoshihide Suga, who wants to continue with aggressive monetary and fiscal measures to boost growth.

While the market focus remained on these major central banks, uncertainty was evident in other monetary policy meetings as well.

The Brazilian central bank kept the interest rate unchanged after nine consecutive cuts while maintaining that it won't reduce monetary stimulus unless inflation starts to heat up.

In a divided outcome, the South African Reserve Bank also decided to keep interest rate on hold, awaiting more clarity on the virus situation.

Indonesia kept the interest rate unchanged for a second month while stressing that quantitative easing was a better way to support the economy.

Overall, central banks are cautious on economic outlook owing to the persisting virus risks and want to continue with accommodative monetary policy. However, fresh measures may not be taken unless there are fresh challenges.

Global economic activity is picking up and unless there are clear signs of recovery stumbling, central banks may choose to hold their ground.