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Commodities continue to sway to bond yields, developments on virus front

The surge in bond yields and thereby gains in the dollar have pressurised commodities, which gained following the nod to the $1.9-trillion US stimulus package and an accommodative stance of global central banks.

March 20, 2021 / 01:12 PM IST

For the past few sessions, there has been one major price-influencing factor for asset classes at large and that is the movement in bond yields. The trend persisted this week as well.

The US 10-year bond yields jumped to January 2020 highs of over 1.75 percent on March 18, lifting the dollar index and pulling down global equities and commodities at large.

Bond yields have been trending higher for the last few weeks, signaling optimism over global growth but also fanning inflationary concerns and interest rate hike expectations. Central banks have pledged to keep monetary policy accommodative but that has done little to arrest the uptrend in bond yields.

The US Federal Reserve on March 17 signaled it was in no hurry to raise interest rates through all of 2023, even as it talked about a V-shaped recovery in the world's largest economy.

The central bank also said though it expected inflation to rise above its target of 2 percent this year, the increase would be transitory with price pressure easing in the coming months. The Bank of England, too, has kept its stimulus programme unchanged.

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The surge in bond yields and thereby the gains in the dollar have pressured commodities, which had gained following the nod to the $1.9-trillion US stimulus package and an accommodative stance of global central banks.

The other factor that has contributed to volatility in commodities is the development on the coronavirus front. Global sentiments have been hit amid a resurgence in coronavirus cases in India, Brazil and some European nations coupled with recent disruption on the vaccination front in Europe. This, however, has been countered by speeding up of inoculation globally led by the US, which has fanned hopes of a faster recovery.

Recent reports say France is set to impose a month-long lockdown across Paris and northern regions as it fears a third wave of coronavirus in face of a faltering vaccine rollout.

Over the last few days, several European nations suspended the use of AstraZeneca Plc's COVID-19 vaccine amid reports of blood clotting. Some of them, including Germany, France and Italy, are to restart the vaccination drive after the EU's drug regulator said on March 18 that the jab was safe and its benefits outweighed the risks.

More recently, markets also remained wary of a further deterioration in US-China relations as the first high-level talks between both the nations after President Joe Biden took office started on fiery note, with each side criticising the other over human rights, trade and international alliances.

Developments related to virus, global recovery and the state of play between the  US and China may have a bearing on commodity prices. In the coming week, the focus, however, will likely be on comments by various central bankers along with Fed Chair Jerome Powell's testimony, which may impact bond yields and thereby commodities at large.

Disclaimer: The views and investment tips expressed by experts on Moneycontrol.com are their own and not those 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: Mar 20, 2021 01:12 pm

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