Commodities will continue to be volatile with central banks in focus

Commodities continue to see volatile trade amid uncertainty over the Russia-Ukraine war, China's economic health, coronavirus spread and the monetary policy stance of major central banks during the week.

While volatility has remained high, most commodities have benefitted from supply risks and rising inflation concerns.

Crude oil was in the spotlight as the price recovered more than 20 percent from the recent lows amid supply risks associated with Russia, which has been slapped with multiple sanctions by the US and its allies.

Industrial metals witnessed mixed trade but aluminium and zinc rose sharply amid rising energy prices and supply risks associated with Russia and China. Gold also jumped to mid-March highs as higher commodity prices increased its appeal as an inflation hedge.

Russia-Ukraine jitters 

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Ravindra Rao

Head - Commodity Research|Kotak Securities

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The Russia-Ukraine war, which is now in its second month, remains in focus as fighting intensifies and talks fail to yield much. Tensions rose this week as the US and the UK imposed fresh sanctions against Russia, while the European Union (EU) pondered a ban on Russian energy exports.

EU leaders, however, refrained from imposing any restriction on Russian energy exports and instead focused on reducing its reliance on Russian gas.

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Market players are worried about the Russian response to increasing economic pressure from western countries. Russia rattled the global market this week by saying it would ask unfriendly states to pay for gas in the ruble.

The US and allies are worried that Moscow may escalate tensions by using nuclear weapons. Unless there is a breakthrough, supply risks may persist and support commodities.

China’s virus worries

Supply risks relating to China also lent support to some industrial metals. Rising virus cases have forced authorities to impose tighter restrictions in certain regions, hampering the production outlook. A lockdown was imposed in Tangshan City, a steel hub in China's northern Hebei Province.

Market players are hopeful that the Chinese government may take more measures to support the economy and while it has helped stabilise the equity market, no steps have been announced so far.

The Fed bug

While commodities benefitted from supply risks, upside remains challenged by the US Federal Reserve's monetary tightening expectations.

The Fed raised the key lending rate earlier this month for the first time since 2018 and is projecting six more rate hikes this year. Chairman Jerome Powell and several Fed officials have also expressed willingness to raise interest rates aggressively if required to control inflation.

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Commodities are in a conundrum as supply risks may persist unless there is a resolution of the Russia-Ukraine issue, while on the other hand, rising prices may keep debate open that the Fed and other central banks may take aggressive measures to control prices.

We may see volatility continue as the market focus may shift from geopolitical issues to central banks. If there is no major development on the geopolitical front, market players may soon start positioning for US non-farm payrolls data as it will give further direction to the Fed's monetary tightening expectations.

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