After robust gains in the last few days, commodities ended the week on a sombre note amid a lack of fresh triggers. Gold corrected after closing in on $1,850 an ounce, while crude oil was trading lower from January 2020 highs and copper has come off its 2013 high.
With a lack of any major event or cue, the trend in the US dollar has been affecting commodities at large. The US dollar jumped to two-month high during the week but lost momentum after mixed US non-farm payroll data and amid Fed Chairman Jerome Powell's cautious tone on the economy.
The dollar, however, regained some lost ground as the US bond yields inched up, while choppiness in equity markets increased its safe haven appeal.
The US equity market jumped to a record high level this week on some improvement in the virus situation and increased expectations of additional stimulus measures.
Despite the gains, equity markets are struggling to build momentum as market players are questioning the sustainability of the rally at record high levels. There is also an increased discussion on the impact of continuing stimulus measures on inflation, fiscal deficit and interest rate expectations. This is despite recent US CPI data showing that price pressure remained benign.
Commodities have lost momentum also as Chinese markets are closed for Lunar New Year holidays. The usual lull in economic activity during holidays is likely to affect demand, especially of industrial metals. However, market players are uncertain about the impact of virus restrictions on demand.
While the virus situation has come under control, the Chinese government is dissuading people from travelling to reduce the chances of virus spread. This is likely to affect fuel demand and impact crude prices. Market players also want clarity if restrictions have impacted demand for commodities like gold which is usually gifted during the New Year holidays.
There is also cautiousness relating to virus and vaccine situation. As per the International Monetary Fund update, the number of new global cases has declined for the last four weeks, however, virus concerns are far from over. There is also uncertainty about the quick spread of virus variants. The vaccination process has picked up but concerns persist about uneven distribution and their effectiveness against variants.
Overall, commodities have lost momentum amid a lack of fresh triggers. While US stimulus optimism and improvement in the virus situation has kept risk appetite supported, market players need fresh triggers to decide if the rally can extend further. Until that happens, the trend in the US dollar may continue to affect commodities at large. In the near term, market focus will be on how soon the US stimulus is approved as well as economic data from major economies.
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