After days of rangebound and directionless movement, commodities have shown some signs of life amid persistent weakness in the United States dollar and continuing optimism about the US and Chinese economy.
Gold, which struggled in the $1,670-1,750 per ounce range for the last few weeks, has moved out and tested the highest level since February 26. Crude oil, which moved within the $58-62 per barrel range for the last few days, has now moved closer to $64 a barrel. Copper, which held in a range near $9,000 per tonne, has now tested the highest level since late February.
The biggest factor supporting commodities is the weakness in the US dollar. The US dollar index has slumped to four-week low as optimism about the US economy is countered by decline in bond yields and Fed's dovish stance. Fed officials including Fed Chairman Jerome Powell have repeatedly played down inflation risks while maintaining that interest rate may remain low for a long time.
While the US equity market gained and the US dollar fell on Fed's dovish stance, bond yields remained at elevated levels. Fed now seems to have convinced bond market players as well that rates may not be raised soon and this led to correction in bond yields. The 10-year bond yield has slipped from January 2020 high of near 1.77 percent to a low of near 1.53 percent.
Commodities have also benefitted from optimism about the US economy on back of some upbeat economic readings. US Retail Sales jumped 9.8 percent in March, the largest increase since May 2020. Initial jobless claims in week ended April 10 fell by 1,93,000 to 5,76,000, lowest since March 14, 2020.
Optimism about the Chinese economy also remains high despite some mixed economic readings and choppiness in equity markets. China's Q1 GDP grew at record pace of 18.3 percent from a year earlier, but was lower than market expectation of 19 percent growth; retail sales rose at a solid pace of 34.2 percent beating market expectation of 28 percent; industrial production grew by 14.1 percent in March year-on-year lower than market expectation of 17.2 percent.
While commodities are showing some positive momentum, there are challenges in the form of rising COVID-19 cases which have forced countries to impose stricter restrictions that are hampering economic activity.
India is witnessing a record number of daily COVID-19 cases. The death toll is rising in places like France and Japan too. Inflationary concerns are also picking up and higher commodity prices may not help alleviate the concerns about rising price.
Market players also await more clarity on the US infrastructure bill. As per a report by Reuters, while the US Senate is expected to take its first step forward on President Joe Biden's $2.3 trillion infrastructure package next week, the Senate Republicans are preparing a narrower proposal less than one-third the size.
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