By Ravindra Rao, CMT, VP-Head Commodity Research at Kotak Securities
As the week (February 19-23) ended, financial markets took a breather in anticipation of the Federal Reserve's preferred inflation gauge. Despite a series of hawkish comments from top Fed officials, markets remained buoyant, with major indices hitting record highs. The dollar, however, showed signs of stagnation around the 104 level, as traders appeared unfazed by the central bank's cautious stance.
Minutes from the January Federal Open Market Committee (FOMC) meeting revealed a predominant concern among officials about the risks associated with cutting interest rates prematurely. The consensus was that interest rates were likely at their peak, but the timing of the first-rate cut remained uncertain. Officials emphasized the need for more evidence of inflation firmly reaching the 2 percent target before considering rate reductions, highlighting worries that progress could stall. This sentiment was echoed in speeches from various officials.
In the precious metals market, COMEX Gold exhibited a tight trading range amid the uncertain rate environment. The yellow metal traded between $2023 and $2045 per ounce, finding support from a softer dollar and geopolitical concerns. Investment activity declined during the week, as reflected in the SPDR gold ETF holdings. As of February 22nd, the holdings dropped to 827.81 tonnes, marking the lowest level since July 2019.
On the price front, gold formed a Bullish Engulfing candlestick pattern last week, leading to an upward trend approaching resistance at $2065 per troy ounce, marked by a falling trendline. A successful break above this resistance could propel gold towards $2085 per troy ounce. Currently, the price action indicates consolidation in the range of $2030 to $2062 per troy ounce, suggesting a temporary equilibrium as traders await a decisive breakout or reversal.
Crude oil, on the other hand, experienced a 2 percent weekly loss, slipping from a three-month high of $79.8 per barrel. The decline was attributed to supply concerns related to attacks in the Red Sea and the Israel-Hamas conflict, overshadowing a gloomy demand outlook from China, the top importer.
Natural gas witnessed significant volatility, with prices surging by as much as 12 percent, triggered by Chesapeake Energy's announcement of reduced gas production in 2024. A Bullish Engulfing pattern on daily charts indicated a positive bias for natural gas, with the pattern low near $1.522 per MMBtu.
In the base metals market, LME metals closed the week on a mixed note. Efforts to address the property crisis in China were met with scepticism regarding the recovery of housing demand. Despite a 25 basis points cut in the five-year loan prime rate, aimed at supporting the property market, investor confidence remained lukewarm.
Looking ahead to the coming week, the spotlight will be on the US PCE price index, the second estimate of US Q4 GDP, ISM Manufacturing PMI, and a series of speeches from Fed officials. Expectations of an uptick in the Fed's preferred PCE price inflation, following hotter-than-expected CPI and PPI for January, may pose a headwind for gold prices.
Meanwhile, China continues to implement measures to support its property sector, including cutting key mortgage rates and urging banks to boost property loans. However, the efficacy of these measures remains uncertain, with calls for reforms growing as China's Parliament convenes next month. Any significant decline in business activity could intensify the need for bold policy decisions, adding to the urgency of addressing economic challenges in the region.
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