Commodities set to end the year with a mixed bag of hope and uncertainty: Ravindra Rao

The year 2020 will be remembered for years to come as a time when the world was hit by a historic health and economic emergency in the form of COVID-19. The pandemic has caused widespread changes and its impact will be seen for years to come. As we enter the year 2021 on a hopeful note, there are still uncertainties which will continue to impact financial markets including commodities.

Commodities rallied sharply in the last few weeks as market players downplayed the current worsening virus situation and chose to focus on improved demand prospects as the vaccination process began in the US, UK, Canada etc.

The rally however hit a roadblock this week as the UK discovered a new variant of coronavirus which is more easily transmissible forcing it to impose severe lockdowns in parts of the country while other countries imposed travel restrictions with the UK. Adding to it, the UK discovered another mutated strain possibly originated in South Africa.

The recent development indicates that the virus situation is still evolving and it is still too early to let our guards down. In the near term, focus will be on how much the new variant has spread and whether current COVID-19 vaccines will help protect against the new strain.

Unless the outbreak is brought under control, some form of restrictions may remain in place and this may dampen demand outlook for commodities. However, if scientists are able to confirm that COVID-19 vaccine can protest against new strains then risk sentiment may improve.

Commodities faced additional challenge in the form of uncertainty relating to the US stimulus. After months of negotiations, the US Congress this week approved a $900 billion stimulus package to support the economy from the negative impact of COVID-19. US President Donald Trump criticized the deal calling for larger support for individuals and families and threatened to withhold his assent. After an initial negative reaction, financial markets steadied on hopes that a stimulus deal may be passed eventually.

Another factor in focus is the UK-EU deal on trade terms which will become applicable once the Brexit transition period ends on December 31. Latest updates show that the UK and EU are close to a deal however uncertainty will persist unless an announcement is made. A deal may help improve outlook for UK and European economies.

Commodities are also being impacted by choppiness in the US dollar. The US dollar index recovered from April 2018 lows set last week as renewed virus risks increased its safe haven allure. The US currency however failed to hold on the gains amid mixed US economic data and US stimulus uncertainty.

Overall, commodities have rallied sharply in the last few months on back of stimulus measures and vaccine progress and while the overall undertone is still positive, virus concerns are far from over and unless the outbreak is controlled, risk may persist.