By Ravindra V Rao, CMT, VP-Head Commodity Research at Kotak securities
Last week's brief positive sentiment gave way to renewed concerns, with attention returning to China's real estate troubles, increasing bets on more Fed rate hikes, and differing opinions on Europe's rate outlook.
The US dollar index surged to a six-month high, reaching 105 levels, driven by subdued risk sentiment stemming from disappointing Services PMI reports out of China and the Eurozone. Meanwhile, the US 10-year treasury note yield edged closer to 4.3 percent, supported by a surprising drop in US weekly jobless claims to their lowest point since February.
In a surprising twist, the ISM Services PMI for August 2023 unexpectedly surged to 54.5, indicating the strongest growth in the services sector in six months. The Federal Reserve voiced concerns that this robust economic activity could sustain inflationary pressures, potentially necessitating further tightening. Additionally, the extension of OPEC+ output cuts pushed oil prices higher, adding to inflation concerns.
COMEX Gold prices faced downward pressure throughout the week, driven by encouraging US economic data. This led to gold experiencing its first weekly decline in three weeks. COMEX Silver also saw a 5.50 percent decline during the week, influenced by weakness in both gold and industrial metals. Worries about rising inflation may continue to bolster the US dollar, potentially exerting further downward pressure on gold prices in the week ahead. However, there could be some short covering ahead of the US CPI release.
LME base metals experienced declines ranging from 1-4 percent during the week weighed down by weak Chinese data and a strengthening dollar. Data from China highlighted sluggish domestic consumption and diminishing global demand for Chinese goods. Import figures have seen consecutive monthly declines with the latest data showing a 7.3 percent decline in imports in US dollar terms for August compared to the previous year.
Exports also slipped by 8.8 percent in August year-on-year. Copper faced additional pressure slipping below $8,300 per tonne, as China's copper imports dropped by 5 percent YoY in August, coinciding with a surge in LME stocks to an 11-month high of 133,850 tonnes.
WTI Crude oil posted a weekly gain of approximately 1.30 percent, reaching a 10-month high at $88.08 per barrel, despite macroeconomic challenges. This increase came as OPEC+ heavyweights Saudi Arabia and Russia both extended their voluntary supply cuts until the end of the year.
Furthermore, EIA inventory data indicated a significant decrease in US crude stockpiles during the previous week, down by 6.3 million barrels to 416.6 million barrels, the lowest level since December. In terms of price action, NYMEX Crude oil finally breached the multi-resistance level at $85 per barrel and has sustained its position above it. Now, bullish traders may have their sights set on the $90 per barrel mark, provided that the $83.80 per barrel support holds.
Looking ahead, the upcoming week will bring a focus on US inflation figures, retail sales data, the ECB monetary policy meeting and a range of Chinese economic data releases. The ECB is expected to announce its final rate hike next week. Bloomberg forecasts that headline CPI will marginally increase to 3.6 percent in August, while core inflation is expected to ease to 4.3 percent. Traders may remain cautious ahead of critical data releases from China, while simultaneously hoping for more stimulus measures in light of consistently weak data releases and widespread losses among domestic property developers
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