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Economic growth worries may keep commodity prices under pressure

Key events in the coming week include manufacturing and services PMI from China, US consumer confidence, and non-farm payrolls report

May 29, 2022 / 02:24 PM IST


Ravindra Rao, VP - Head Commodity Research at Kotak Securities

Just a week after commodities showed some signs of life, they have turned directionless as market players counter continued weakness in the US dollar against increasing growth concerns.

Gold retreated after testing two week high and is hovering near $1850 level; industrial metals have largely weakened while crude oil has gained but remains well below recent highs.

The trend in other asset classes also showed increasing uncertainty. Safe havens like US bond, Japanese yen and Swiss franc continued to rise while equities witnessed a mixed trend. US Dow Jones Industrial Average index recovered from March 2021 lows hit a week ago while Chinese equities are set to end little changed but are well off the lows.

The US dollar index slumped to a one month low amid lower bond yields, some disappointing US economic data, and reduced safe haven buying. Increasing debate about the US Fed’s monetary tightening stance has also caused market players to move out of the dollar.

Fed minutes released this week showed that policymakers support two more 50 basis point rate hikes at upcoming meetings and believe that aggressive moves could give them flexibility to alter stance if required. Earlier this week, Fed Bank of Atlanta president Raphael Bostic urged his colleagues to proceed with care.

The minutes and comments from Bostic have fuelled speculation that the US central bank may slow down the pace of rate hikes in coming months to avoid any severe negative impact on the economy.

Global growth worries have increased demand concerns for commodities. Growth concerns have risen amid some disappointing economic readings, warnings by major leaders, and China's struggle to get the virus spread under control.

Manufacturing Purchasing Managers' Index data from the US and Europe released this week showing slower growth. US manufacturing PMI slipped from 59.2 to 57.5, UK manufacturing PMI fell from 55.8 to 54.6 while euro-zone manufacturing PMI slipped from 55.5 to 54.4.

US economic data released this week also largely disappointed. US first quarter GDP growth estimate was revised down from -1.4 percent to -1.5 percent as against expectations of a revision to -1.3 percent. Housing data also disappointed while regional manufacturing indices showed slower growth.

Chinese economic data also showed signs of stress owing to virus restrictions. China's industrial profits fell 8.5 percent year on year in April after 12.2 percent growth in March. The slump is the biggest since March 2020.

Comments from global leaders added to growth worries. China Premier Li Keqiang said the economy was in some respects faring worse than in 2020 when the pandemic first emerged and that more needs to be done to stabilise it.

Meanwhile, World Bank head warned that Russia's invasion of Ukraine could cause a global recession as the prices of food, energy and fertiliser jump. IMF head warned that 2022 would be a tough year and declined to rule out a global recession if conditions worsened markedly.

On the virus front, China’s Shanghai region is set to lift lockdown on June 1 with improvement in the situation, however, Beijing is still struggling to get the virus spread under control. Market players believe that China may take a gradual approach to lifting restrictions to avoid any resurgence in cases but this may also slow down economic recovery.

Commodities saw a brief rise but are losing momentum amid increasing worries about economic slowdown. Growth worries may keep pressure on prices and focus will largely be on economic data, central bank comments, and China’s efforts to support growth. The key events in the coming week include manufacturing and services PMI from China, US consumer confidence, and non-farm payrolls report.

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Ravindra Rao
Ravindra Rao is the Head - Commodity Research at Kotak Securities.
first published: May 29, 2022 02:24 pm