Ravindra Rao, VP - Head Commodity Research at Kotak Securities
Commodities saw brief respite during the week ended May 6 after Federal Open Market Committee (FOMC) statement eased concerns of an aggressive monetary policy tightening while lingering Chinese growth concerns and sharp rebound in the dollar prompted pullback from higher levels touched earlier in the week.
The much keenly awaited FOMC decision was on expected lines as the Federal Reserve delivered a 50-bps rate hike. But hints by Fed chair Jerome Powell that the pace would remain the same over the next couple of meetings and they are not actively looking at a 75 bps rate hike eased market nerves about aggressive moves at least in the near term. This brought cheer to the markets leading to rally in both equities and commodities while dollar and treasury yields were weighed down. However, optimism did not last longer as dovish Bank of England (BoE) statement brought investors' focus back to the fact that US Federal Reserve still remains more hawkish than its peers.
Bank of England increased benchmark rate to 1 percent from 0.75 percent at its May meeting, but issued a dovish policy outlook as it warned of double-digit inflation and a prolonged period of stagnation or even recession. The European Central Bank (ECB), too, remains wary of aggressive policy stance owing to direct economic repercussions from the Russia-Ukraine conflict, while the Bank of Japan reiterated on its commitment to ultra-low interest rates.
Gold prices jumped to $1,910 per troy ounce earlier in the week after less hawkish FOMC statement. However, lingering global growth concerns and higher inflationary pressures provided cushion to the yellow metal even after a strong rebound in the dollar index.
Crude oil prices gained momentum as the European Union (EU) announced plans to ban Russian oil imports within six months and refined products by the end of the year in its sixth round of economic sanctions. This buoyed supply disruption concerns owing to EU’s high reliance on Russian energy imports and lack of alternative sources.
Copper fell below $9,400 per tonne, lowest since December 2021 and other base metals too declined hurt by a double whammy of strong dollar and China's strict compliance to the Zero-COVID policy. Chinese Politburo's supreme standing committee reaffirmed their support to lockdowns to eradicate the virus despite economic damage and mounting pressure to relax virus curbs.
US equities saw a worst one-day fall in two years on Thursday, erasing all the gains made earlier while European equities were weighed down by pessimism in global markets coupled with gloomy economic outlook by the Bank of England. Chinese equities were no different either as investors keenly await stimulus measures amid sharp contraction in factory activity and fears of economic slowdown.
Now, markets cautiously await US labour report and inflation figures, both of which may be closely watched by the Federal Reserve. Also, tensions may escalate further between Russia and the West as EU plans to disconnect Russia's largest bank, Sberbank, and the Credit Bank of Moscow and the Russian Agricultural Bank from the international payments system Swift while US is likely to discuss potential additional sanctions against Russia with G7 leaders.
Besides, China is yet to deliver on its promises of providing economic support at a time when even three-decade low growth target of 5.5 percent does not look feasible. Unless the mainland nation announces significant targeted measures, sustainable pick up in global risk appetite looks unlikely.
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