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Most commodities trade higher amid economic recovery and stimulus, but await fresh triggers

While rising cases are a cause of concern, market players want more clarity on whether it is affecting economic recovery or not.

August 19, 2020 / 09:39 AM IST

Ravindra Rao

Most commodities in the international market are trading near their recent highs benefitting from weaker US dollar, general strength in US and global equity markets as well as pickup in economic activity in China. China has boosted imports of major commodities in the last few months to benefit from lower prices and to support economic recovery.

While these factors have kept prices propped up, the market lacks momentum at present due to lack of fresh triggers. Market players are awaiting more clarity on various issues like US stimulus talks, US-China tensions as well as impact of rising virus cases on global economic recovery.

The biggest uncertain factor is US stimulus talks. US policymakers are holding discussions but are yet to come to a consensus on additional fiscal stimulus package. A number of Federal Reserve officials have expressed concerns that US economic recovery may slow down if fresh stimulus is delayed.

Uncertainty in the market is evident from the fact that the US dollar index is pressurized due to political impasse over additional stimulus measures. However, US equity markets continue to hold on to their gains reflecting optimism that some deal may take place.

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The US dollar is also struggling for direction ahead of FOMC minutes this week. The Fed has so far maintained a downbeat outlook for the economy while reiterating willingness to take all possible measures to support the economy. FOMC minutes will be watched for more clarity on future economic outlook as well as monetary policy outlook.

The US and China have been at loggerheads over various issues and have taken retaliatory measures against each other however we have seen little negative reaction yet especially on commodity prices. While rising tensions is a concern, we may see a reaction if it affects the trade negotiations.

Virus cases are rising globally and we have seen a fresh surge in cases in some European and Asian countries as well as in Australia and New Zealand. Rise in virus cases has caused these countries to slow down reopening processes or even impose some form of restrictions.

While rising cases are a cause of concern, market players want more clarity on whether it is affecting economic recovery or not. So far economic indicators from major economies have pointed towards continued improvement and unless we see a spate of negative economic readings we may not see much reaction.

Overall, commodities have recovered sharply from the slump seen earlier this year partly due to economic recovery and partly due to stimulus measures which has flushed financial markets with liquidity. However, we now need fresh triggers for the rally to sustain.

The author is VP - Head Commodity Research at Kotak Securities.

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 19, 2020 09:39 am
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