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'Commodities to struggle amid Fed uncertainty, increasing virus cases, tensions in Afghanistan'

Market players are trying to assess what will be Fed's next step at the upcoming meeting on September 21-22.

August 28, 2021 / 07:57 AM IST

Commodities continued their directionless trade amid increasing challenges in the form of rising virus cases, uneven recovery, China's growth concerns, geopolitical tensions and uncertainty about Fed's monetary policy.

Commodities across the board started the week on a firm note and registered sharp gains as the US dollar weakened and equities strengthened on hopes that Fed may not start monetary tightening soon.

Comments from Dallas Fed President Robert Kaplan late last week fueled hopes that the central bank may take a cautious approach amid persisting virus risks to the US and global economy. Mixed economic data from the US economy also highlighted uneven recovery.

While commodities at large have moved together indicating lack of direction in the market, natural gas has been an outlier. Natural gas has jumped to December 2018 highs amid robust demand for US gas and supply concerns amid increased storm activity in the Atlantic.

Gold rescaled $1800 per troy ounce while copper recovered sharply from April lows, and Brent crude rescaled $70 per barrel.

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However, the upward momentum ran out of steam soon as market players began positioning for Fed Chairman Jerome Powell's comments at the Jackson Hole Symposium. Adding to it were some hawkish comments from Fed officials who advocated monetary tightening citing growth and resilience to virus outbreak.

There is an increasing debate about Fed's monetary tightening amid growth optimism and rising price pressure however there is a divide amongst Fed officials and this has caused uncertainty. Market players continue to react to economic numbers and central bank comments to gauge how soon Fed may start monetary tightening process.

The first cue may come from the Fed Chairman's comments. Given the recent comments from Fed Chairman Jerome Powell, mixed US economic numbers and persisting virus risks, it is likely that the central bank head may maintain a less hawkish stance. However, a surprise outcome, in the form of a clear timeline for tapering bond purchases could result in severe reaction.

The next challenge will be the US non-farm payrolls report next week which will give more clarity about the health of the labour market. Continuing improvement in the labour market and rise in wage pressure may force central banks to tilt towards monetary tightening.

Market players are trying to assess what will be Fed's next step at the upcoming meeting on September 21-22. With renewed virus concerns, market players have played down the possibility that the Fed may alter its monetary policy at this month's meeting. However, uncertainty will prevail and affect commodities at large.

While Fed remains on forefront, commodities are also struggling amid worries about China's economic health and regulatory crackdown measures, increasing spread of the virus cases and increasing tensions in Afghanistan.

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.
Ravindra Rao Ravindra V Rao is the Head - Commodity Research at Kotak Securities.
first published: Aug 28, 2021 07:57 am
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