US debt ceiling deal to set the tone for commodities market next week

Commodities

Market sentiments were mixed this week as optimism of US debt ceiling resolution supported risk appetite while rising speculation that the Fed may raise interest rates again kept traders wary.

US dollar extended gains for a second week as several Fed officials highlighted the ongoing internal debate over a pause on rate hikes in the FOMC June meeting, while some like Richmond Federal Reserve President Thomas Barkin and Dallas Federal Reserve President Lorie Logan explicitly left the option of doing more on the table, in order to tame stubborn price pressures.

The greenback received further support from hopes of final debt ceiling deal and positive economic data from the US, both pushing markets to revise their interest rate expectations. Still strong consumer spending and tight labour market, as indicated by favourable retail sales and falling jobless claims respectively, have also added to rate hike bets.

COMEX Gold saw 2 percent decline for the week, worst since February, and slipped to two months low of $1,954.4 per troy ounce intraday on Friday as safe haven bids took a hit amid easing concerns about the health of US local banks and US debt default. Investment demand, too, showed signs of fading investor interest as can be seen in consistent outflows from SPDR ETFs.

Similar trend was seen in Silver amid softer gold and industrial metals coupled with falling iShares holdings. On the price front COMEX gold has finally penetrated the support $1,970 per troy ounce held by the bulls for almost a month. A close below $1970/oz might give the bears the edge to pull it further lower towards $ 1938/oz. On the flipside if the bulls regain $2,000 per troy ounce we can conclude a temporary bottom is in place.

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Ravindra Rao

Head - Commodity Research|Kotak Securities

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Base metals mostly traded lower with most hitting fresh multi-month lows as Chinese economic data largely missed expectations and sparked concerns regarding the faltering pace of recovery, thereby hurting demand prospects. Aluminum being the only exception with 2 percent gains on sharp increase in stocks earmarked for delivery.

On the other hand, WTI Crude oil saw 2.3 percent weekly upside, first weekly gain since mid-April, supported by US debt deal optimism, supply disruptions from wildfires in Canada and favourable demand outlook by IEA (International Energy Agency). IEA estimated world oil demand to rise to 102.01 mbpd in 2023, an increase of 2.21 mbpd from last year and around 1.3 mbpd higher than pre-pandemic 2019.

On the technical front, WTI crude has held the double bottom support near $64 per barrel. Until the said support holds a bounce back till $75.80 a barrel can’t be ruled out.

FOMC meeting minutes, Fed’s preferred PCE price index and preliminary PMIs from US, UK and Eurozone will be in focus for the coming week. US debt ceiling uncertainty might be resolved by this week or next and then focus will again turn to economic data and monetary policy outlook. FOMC meeting minutes might signal rising odds for a Fed pause.

Additionally, US Core PCE will be eyed as easing price pressure may again moderate rate hike bets as FOMC officials are currently divided on a pause or another rate hike at the June meeting.

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