Commodities on strong footing but volatility may continue amid several uncertain factors

Commodities have witnessed a directionless run in last few days as market players assess developments relating to Russia-Ukraine war, China’s virus spread and monetary policy stance of major central banks.

Commodities gained some momentum as US inflation data failed to surprise the market participants and China eased virus related restriction, while the Russia-Ukraine fighting continued. Gold has jumped to mid-March highs and crude has bounced back sharply above the key $100 per barrel level. Industrial metals have also seen some footing amid sharp rise in zinc prices.

Data released this week confirmed the rising prices. US consumer price rose 8.5 percent on the year in March, the fastest pace since 1981 but largely in line with expectations. India's consumer price rose 6.95 percent in March, a 17-month high. German consumer price rose 7.3 percent on an annual basis in March, a 40-year high.

Inflation data is being assessed from multiple angles. Higher price pressure strengthens the case for faster monetary tightening which may impact liquidity and slow down growth hampering demand. However, rising price pressure has also increased appeal for gold and other commodities as a hedge against inflation.

Also with consumer prices rising globally, all central banks will take measures to control prices but their approach may wary. The pace of monetary tightening of Fed and other central banks may impact trend in US dollar and thereby commodities. The US dollar index jumped to fresh May 2020 highs this week as Fed is expected to take an aggressive monetary tightening approach at its upcoming meeting. The pace of gains in US dollar may however slowdown as other central banks also take a hawkish tilt to control prices.

Commodities gained some footing also on expectation of change in China’s COVID-19 policy. China imposed strict lockdown in Shanghai amid rising virus cases fueling worries of slower economic activity. While fresh cases continued to rise, China eased some virus related restrictions highlighting a possible shift in its zero tolerance COVID-19 policy which could ease pressure on the economy.

Commodities are also supported by hopes that China may take measures to support the economy. China’s Premier Li Keqiang issued a third warning about economic growth risks in less than a week. This added to expectations that authorities may move quickly to support the economy.

The continuing Russia-Ukraine fighting has also added some risk premium on commodities. Fighting entered the eight week while there are no efforts to restart negotiations. Tensions rose further as Russian President Vladimir Putin vowed to continue the war in Ukraine. Unless there are serious efforts to resolve the issue, supply risks may continue to support commodities.

Commodities are on a stronger footing but volatility may continue with lots of uncertain factors. Key event to look for in coming week would be China's GDP and industrial production and retail sales data and manufacturing PMI from Europe and US.