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Commodities struggle for direction as focus shifts to central banks

The key event in the coming week is FOMC decision on November 2-3. Comments from Fed officials and FOMC minutes indicate that criteria to start bond tapering has been largely met.

October 29, 2021 / 07:34 PM IST

Ravindra Rao, VP - Head Commodity Research at Kotak Securities

Commodities witnessed another volatile week as market players remained nervous about more interventions to stabilize prices.

China's coal prices have continued to slide as China intensified measures to improve supply and curb speculative and hoarding activity and limit prices. As per Reuters report, China aims to cap the price of its most-popular 5500-NAR grade coal at 440 yuan ($69) a ton at the pithead. Additional pressure on prices came as China's planning agency NDRC noted that there is still room for China to further adjust coal prices.

Commodities rallied sharply earlier this month amid surge in coal and natural gas prices. Crude oil rallied on hopes that higher gas and coal prices may lead to fuel switching while industrial metals gained on concerns that rising energy costs may impact production activity and gold remained near $1800 per troy ounce as rising commodity prices fueled inflation concerns.

With coal prices correcting sharply and natural gas also off the highs, commodities have seen some correction. Brent crude has come off the October 2018 highs while industrial metals have also weakened. Aluminium, the most energy sensitive commodity, slumped to August lows, amid sell-off in coal prices. Copper slumped sharply last week after LME began investigation in recent fluctuations but has turned range bound since then.

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Commodities are also pressurized by growth worries. US Q3GDP growth slowed from 6.7 percent to 2 percent beating market expectations of 2.7 percent reflecting impact of surge in virus cases, supply chain issues and labour shortages. The flattening of bond yield curve amid drop in long term bond yields also reflect rising growth uncertainty.

While China's continuing efforts to check energy prices has impacted commodities at large, market reaction may subside as energy crisis is far from over as supplies are still tight and we are close to high demand winter season. Commodities have also gained support from weakness in US dollar and relative stability in equity markets.

The key event in the coming week is FOMC decision on November 2-3. Comments from Fed officials and FOMC minutes indicate that criteria to start bond tapering has been largely met. However, some Fed officials including Fed Chair Jerome Powell has maintained that interest rate hikes may not happen soon. We now need to see if Fed announces bond tapering at this meeting or not.

Ahead of Fed meeting, Bank of Japan and ECB kept monetary policy unchanged and maintained support for accommodative policy reflecting challenges to the economy. The US dollar index has also slipped to near 1-month despite increased expectations of Fed monetary tightening. Fed's stance on bond tapering and clarification on interest rates may impact US dollar as well as risk sentiment. Apart from Fed, focus will also be on Bank of England meeting. BOE has taken a hawkish tilt amid continuing rise in inflation pressure and we need to see if the central bank may act immediately.

Disclaimer: The views and investment tips expressed by investment expert on Moneycontrol.com are his own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.



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Ravindra Rao Ravindra V Rao is the Head - Commodity Research at Kotak Securities.
first published: Oct 29, 2021 07:34 pm
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