After months of upmove on back of robust demand from China and weakness in the US dollar, commodities have turned directionless in the last few days as the focus has shifted to the US economy while the US dollar has benefitted from safe-haven buying.
China has been a major bargain buying of commodities in the last few months as is evident from imports, however, the pace is slowing down. Higher prices and challenges to Chinese economy have slowed purchases.
China imported 11.8 million barrels per day of crude in September, up from 11.18 million bpd in August, but shy of the record 12.94 million bpd in June. China's import of unwrought copper and copper products stood at 7,22,450 tonnes last month, close to the record 7,62,210.9 tonnes imported in July. Crude oil has been trading in a broad range near $40 per barrel for the last few months after slumping to multi-year lows. Copper tested the highest level since 2018 last month.
China has been the bright spot as the virus outbreak has been relatively under control while economic activity is picking up. Recent economic indicators, however, show some signs of strains. China's inflation data released this week failed to meet expectations while trade surplus narrowed sharply.
The US dollar index slumped to 2018 lows earlier this year pushing commodities higher but has seen a substantial recovery since then as the resurgence in virus cases in Europe has increased its safe-haven appeal. Concerns about the UK-EU deal over post Brexit trade terms have also caused investors to seek safety of the US dollar.
The recent directionless trade in financial markets is amid uncertainty about US stimulus. Mixed US economic data and comments from Fed officials indicate an increased need for stimulus to boost US economic recovery. US policymakers have continued with efforts to finalize a new fiscal stimulus package but have failed to make much headway.
The wide gap between US policymakers over terms of fiscal package, increasing focus on the nomination of Supreme court Justice and near Presidential elections on Novembe 3 has fueled market expectations that a deal may not happen soon. Market players are however hopeful that a new government may be able to approve the stimulus.
US stimulus talks will impact the outlook of the US economy as well as general risk sentiment and trend in the US dollar and thereby commodities at large. The general market perception is that a stimulus deal will be good for the US economy so if a deal happens soon we may see riskier assets like commodities edge up. However, there are other challenges as well. Market players also have to assess the impact of possible regime change in the US on economic policies and measures. Another major challenge is the continuing surge in virus cases with not much clarity on how soon a vaccine could be found.
(Ravindra Rao is the VP - Head Commodity Research at Kotak Securities.)
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