Commodities may remain volatile amid Russia-Ukraine talks, China concerns

Commodities trended lower for the second consecutive week as market played down risks associated with Russia-Ukraine while China came into focus with rise in virus cases and sell-off in equity market and Fed announced its much awaited rate hike.

Gold slipped briefly below $1,900 per troy ounce as reduced safe haven buying and inflation hedge demand was coupled with Fed's tightening expectations. Crude oil slumped to over 2-week low amid easing supply risks relating to Russia and demand concerns amid rising virus cases in China. Industrial metals trended lower led by aluminium amid correction in energy prices and concerns about the Chinese economy.

Commodities rallied sharply earlier this month as Russia-Ukraine fighting fueled supply risks and inflation concerns. Commodities however were corrected with equal ease as Russia and Ukraine stepped up efforts to resolve the issue. Comments from both sides have indicated willingness to compromise with Russia emphasising on Ukraine's neutrality while Ukraine wants security guarantees.

Also Read | Gold set for worst week since November as safe-haven demand eases

While market players have played down risks associated with Russia-Ukraine, market confidence may wane if no resolution is reached soon. Russia-Ukraine fighting has entered the fourth week and Russian attacks continue to widen. Earlier this week there were reports of a Russian strike at a Ukraine army base near Poland. Comments from western countries also do not reflect confidence in talks. The US President branded the Russian President a war criminal while France warned that Russia is just pretending to negotiate.

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Ravindra Rao

Head - Commodity Research|Kotak Securities

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China came into focus this week as rising virus cases forced authorities to impose lockdowns in certain regions fueling concerns that economic activity may be impacted. Chinese tech stocks slumped amid worries about delisting on US exchanges if accounting standards are not met. China's central bank decision to keep the key lending rate also disappointed some. Chinese equities however recovered sharply amid promises that more measures may be taken to support the economy.

Commodities slumped this week also as market players positioned for Fed's monetary policy. The Fed raised its key lending rate by 0.25 percent, the first hike since the start of the pandemic. Fed projections also highlighted the possibility of six more rate hikes this year. The Fed has taken a hawkish stance with inflation out of control however the decision was largely anticipated and we saw some recovery post the decision.

Also Read | Oil prices headed for weekly loss, but stay well above $100/bbl

Commodities rallied sharply with the start of Russia-Ukraine fighting and have now corrected with talks continuing to resolve the issue. We are now in a wait and watch mode as more clarity is awaited however if no resolution is reached soon, supply concerns may revive. Concerns about China may prevail unless there is improvement in the virus situation or concrete efforts to boost growth. The Fed has taken a hawkish stance but market expectations may be impacted by US economic numbers and other central bank decisions. With so many uncertain factors, volatility is here to stay.

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