Commodities witnessed mixed trade this week amid increasing uncertainty as market players assessed Fed’s monetary policy stance as well as China’s economic outlook and power crisis in Europe and China.
Gold tested 3-week low but recovered and is set to end the week with a marginal gain reflecting the mixed trade in the US dollar. Most industrial metals are also set for weekly gains as supply concerns and China’s efforts to support economy countered demand concerns. Crude oil recovered almost 10 percent from recent lows but lost momentum near $95 per barrel level.
The US dollar, commodities inverse relation remains intact. The US dollar index jumped to 5-week high earlier in the week on safe haven buying, higher bond yields and hawkish comments from Fed officials. The US dollar index however came off the highs as market players positioned for Fed Chairman’s comments at the annual Jackson Hole Symposium.
The Fed officials have largely maintained support for continuing rate hikes as inflation is still out of control. However, market players are trying to assess if the central bank may slow down owing to increasing challenges for the economy. Fed Chairman’s comments are set to give further direction to the debate.
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The Fed’s debate between inflation and growth kept the US dollar choppy which reflected in commodities as well. Amid increasing uncertainty, market players may look at economic numbers and central bank comments to determine future monetary policy stance.
Commodities saw additional volatility due to uncertainty about China. Concerns about Chinese economy are high amid disappointing economic numbers, stress in the property market and struggle to get the virus spread under control. Outlook for the economy worsened amid ongoing power crisis as power rationing in certain regions started hampering economic activity.
Market sentiment however improved as China stepped up efforts to support the economy. China’s central bank has cut lending rates to improve liquidity and government has announced measures to boost infrastructure spending and increase lending to the beleaguered property sector. Amid the latest, the State Council outlined a 19-point policy package to support the economy but also stated that economy won’t be flooded with excessive stimulus.
Chinese equity market slumped to over 2-week low but saw some recovery late in the week. Chinese yuan tested Aug.2020 lows against the US dollar. The pressure on yuan and Chinese equities show that market players are not confident that these measures may be enough to boost growth.
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Commodities wavered also as market players assessed demand supply impact of Europe’s power crisis. Natural gas price and power prices in Europe have risen sharply owing to reduced supply from Russia and robust cooling demand due to hot weather. Rising power prices started hampering economic activity and this dented outlook for the economy. However, some commodities like zinc, aluminium benefitted from expectations that production activity may also be impacted hampering supply. Crude oil also edged up on expectations of higher fuel switching. Rising power prices may also exacerbate the inflation situation increasing gold’s appeal as an inflation hedge.
Commodities may continue to witness choppy trade in the near term as it is unlikely that we may get much clarity about Fed’s monetary policy stance. Power crisis in Europe and China is also not likely to get resolved soon while uncertainty about China may also prevail. The next major event to look for will be US non-farm payrolls report on September 2 which will reflect upon health of the labour market. The Fed may not alter its stance much unless there are signs of stress in the labour market or significant improvement in the inflation situation.
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