Lingering Middle East tensions and better US GDP figures may unsettle markets

Commodities Market Trend

Kaynat Chainwala

Escalation of the Israel-Iran conflict and recalibration of the US Fed's rate cut expectations kept traders on edge this week.

The Dollar index held above the 106 level as stronger-than-expected US retail sales and hawkish comments from Fed officials reinforced bets that the Fed will wait longer before starting to cut interest rates. Better-than-expected growth in retail sales in March and an upward revision in February figures underpin resilient consumer spending despite higher inflation and borrowing costs.

Federal Reserve Bank of Cleveland President Loretta Mester believes the Fed can hold interest rates steady, and Atlanta's Raphael Bostic reiterated that it will be appropriate to lower borrowing costs towards the end of the year. Neel Kashkari, the Minneapolis Fed counterpart,  said the central bank needs to be more confident that inflation is indeed declining before cutting rates, and could possibly delay such a move until after 2024.

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Kaynat Chainwala

Senior manager - commodity research|Kotak Securities

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Prospects of rate cuts anytime soon dimmed sharply as Fed Chair Jerome Powell acknowledged the ``lack of further progress'' on inflation this year. This, coupled with fresh conflict in the Middle East, spurred buying in the Dollar and US treasuries, while the S&P 500 dipped below 5,000 levels and Nasdaq plunged 5 percent.

COMEX Gold prices witnessed the fifth consecutive weekly gain and traded well above $2,400 per troy ounce aided by geopolitical risks, robust Chinese demand (both investment and central bank), and a sharp rise in speculative buying (net longs at a four-year high). After the recent run-up, a pullback in gold prices is likely in case further escalation is avoided in the Middle East.

Not only the uptick in gold and industrial metals, but also a bullish demand outlook from the Silver Institute drove Silver to close the week with a 1.6 percent weekly advance. LME base metals extended gains for the third week in a row, with some counters experiencing inventory pressure in response to the latest sanctions on Venezuela, while others benefited from concentrated tightness.

WTI Crude oil surged to $86.3 a barrel on Friday after unverified reports of explosions in Iran, Syria, and Iraq erased all the gains and closed the week 3 percent lower at $83.5 a barrel. Crude oil prices largely remained under pressure this week despite discussions between the US and EU regarding fresh sanctions against Iran, and the US reimposing oil sanctions on Venezuela.

Risks of a wider regional conflict run high as Israel had struck targets in Iran in response to an unprecedented missile and drone attack last weekend. Besides, a strong dollar and elevated yields as swaps are pricing in the first quarter-point cut by September and less than a 45-basis-point (bps) cut for the year, do not bode well for market sentiments.

While the Bank of Japan policy's decision may be complicated by more than expected easing in the CPI, better Q1 US GDP estimates and PCE price index figures may bolster the "higher for longer" narrative and further unsettle markets.

The author is Senior Manager, Commodity Research, at Kotak Securities

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