Ravindra Rao, VP - Head Commodity Research, Kotak Securities
Commodities witnessed another volatile week as market players continued to assess the virus situation. Gains in equities and weakness in the US dollar, however, helped most commodities edge higher. Light trading environment near year-end holidays added to choppy trend and this may continue in the near term.
COMEX gold saw mixed trade but held in a range near $1,800 per ounce as wariness about Fed’s monetary tightening continued to limit upside. Industrial metals traded largely higher led by sharp gains in aluminium and zinc as improved risk sentiment was coupled with supply risks and hopes of China’s stimulus measures. Crude oil recovered to test late November highs amid easing virus concerns and decline in the US crude oil stocks.
Global financial market has been mired by virus uncertainty through the last few weeks as market players tried to assess the severity of the Omicron variant of corona virus. Omicron cases have continued to rise globally, while countries are imposing restrictions to limit the spread.
Early studies showed that the Omicron infection may not be as severe as its predecessors, while booster shots of some existing vaccines may provide protection.
Risk sentiment weakened earlier this week as a number of European countries tightened restrictions to limit the spread just days ahead of holiday season. Risk appetite improved as studies signalled that Omicron may be less likely to land patients in hospital than Delta.
Meanwhile, lab results indicated a third dose of AstraZeneca Plc’s vaccine significantly boosted antibodies against the strain. Additionally, Pfizer’s and Merck’s COVID-19 pills gained clearance for emergency use in the US. On other hand, a laboratory study found that two doses and a booster of Sinovac’s COVID-19 vaccine did not produce sufficient levels of neutralising antibodies to protect against the Omicron variant.
The volatile trade was also fuelled by uncertainty about Chinese economy as well as US spending bill. Concerns about the Chinese economy are high amid mixed economic data and rise in virus cases and stress in property market. However, this is countered by expectations that the government may take additional measures to support the economy. Earlier this week, China’s central bank cut the key lending rate for the first time since April 2020. This came just days after the central bank lowered the reserve requirement rate for most banks.
Risk appetite dropped earlier this week as US President Biden’s $2-trillion spending bill package faced a setback as a Democrat Senator refused to support it. Uncertainty relating to the spending bill caused Goldman Sachs and Morgan Stanley to lower their GDP growth forecast for the US economy. Market reaction, however, subsided as negotiations continued and President Biden expressed optimism that the bill may get through the US Congress.
The year 2021 has been a good one for commodities as most benefitted from tighter supply and improved demand. While we are set to enter the new year with lots of uncertainties ranging from virus spread to Fed’s monetary tightening and China’s property market crisis, market players have still not given up their bullish bets.
In the near term, we may see volatility as market players square up position before year-end and assess the outlook for 2022. The only major event before year-end is China’s manufacturing and services PMI data. So, we may see continued focus on virus situation as well as China and US spending bill negotiations.
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