Commodities witnessed a good start to the year amid rising inflation concerns. The sector, however lost some momentum this week as risk sentiment remained weak while the US dollar index zoomed to fresh highs.
Earlier this week, gold breached $1850 per troy ounce level for the first time since November. However, it witnessed a sharp correction post Fed decision and slipped below the $1800 per troy ounce level. Crude oil hit fresh 2014 highs amid tightness concerns but sell-off in equities and firmer US dollar led to bouts of profit taking. Copper remained below $10,000 per tonne level amid weakness in Chinese and global equity markets.
The US dollar index weakened earlier this month as market players assessed Fed's monetary policy stance against other central banks. The US currency, however, regained its momentum and tested the highest level since June 2020 amid general optimism about the US economy and Fed’s monetary tightening expectations.
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The US central bank held its monetary policy meeting this week and kept monetary policy unchanged. The Federal Open Market Committee (FOMC) statement noted that the bond buying program may end in March and that it will soon become appropriate to raise interest rates. Fed Chairman Jerome Powell, in his post meeting conference, indicated that Fed officials supported a March rate hike and also emphasized on getting inflation under control.
With US consumer prices rising at the fastest annual pace in 40 years and inflation outlook worsened by rising energy and commodity prices, market expectations picked up that Fed may consider faster and steeper rate hikes. Signs of strength in the US economy also supported a case for Fed's tightening. US GDP rose 6.9 percent in Q4 well above market expectations of 5.5 percent growth while 2021 growth was the highest since 1984.
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Risk sentiment was also challenged by increasing geopolitical tensions. Market fears are high that Russia may invade Ukraine soon, which may cause US and other western countries to impose sanctions on Russia which may result in a wider conflict. North Korea's successive missile tests and increasing attacks in the Middle-east has also dampened risk sentiment.
Corporate earnings results also highlight increasing challenges amid persistent virus spread, increasing energy and other costs, supply chain issues, labour shortages etc. As per Reuters report, in aggregate, companies are reporting earnings 3.2 percent above expectations, well below the average of 16 percent for the past four full quarters and below the long-term average of 4.1 percent since 1994.
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This volatile trade is likely to continue in the near term as market players shift focus from Fed to other central banks to see if they follow suit. The Bank of England and European Central Bank will hold their monetary policy meeting next week, which may determine whether the current rally in US dollar will continue, or not.
We may also continue to look at US economic data to gauge if the economy is strong enough for the Fed to move immediately. The key indicator will be non-farm payrolls data next week which will reflect on the health of the labour market. Crude oil's incessant rise has also caused nervousness in the larger financial market and we may see more volatility as OPEC and allies will meet to decide their future production policy. Lack of China's participation could also keep industrial metals and commodities at large volatile. Chinese markets will be closed next week for Lunar New Year holidays.
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