Volatility likely to persist in commodities; central bank comments, economic data, China in focus

The Federal Reserve's monetary policy meeting was the key event of the week, however, the mixed reaction to the outcome across asset classes showed that the market players were still uncertain.

As expected, the US central bank left interest rate and bond purchases unchanged. The Fed also indicated that bond tapering may happen soon but gave no clear timeline and tied it with sustained economic recovery. Its economic projections show that more Fed officials favour a rate hike as early as the next year.

The projections, however, also indicated that the economic growth this year will be slower than previously estimated.

So, while it continues to move towards monetary tightening, the Fed is sticking to a flexible approach, given the risks to the US as well as the global economy.

Rising raw material and energy costs and supply-chain issues have hampered economic activity even as virus outbreak is yet to be controlled globally.

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Ravindra Rao

Head - Commodity Research|Kotak Securities

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Mixed US economic data also reflects uneven recovery. Manufacturing and services PMI data disappointed, while weekly jobless claims rose.

Also read: Fed's coming taper fans talk of renewed 'reflation' trade

The US equity market edged up after the Fed decision, with market players cheering the fact that no immediate action was taken despite growth optimism and rising price pressure.

On the other hand, the US dollar index rallied to a month’s but failed to sustain and corrected as gains in equity reduced its safe-haven appeal.

Some disappointing US economic data and the Bank of England's cautious but hawkish stance also pressured the dollar.

Also read: Sensex closes above 60,000 on supportive cues; realty index gains over 20%

Gold weakened sharply as the Fed's interest rate hike projections were coupled with improved risk sentiment and tested a six-week low before moving back to $1,750 a troy ounce.

Other commodities saw volatile trade as market players tried to assess the Fed's monetary policy stance and China's economic health.

Commodities plunged earlier in the week amid worries about systemic risks in China owing to debt concerns surrounding the Evergrande Group.

Also read: How to tell if the Evergrande crisis is spilling beyond China

The worries, however, subsided as China's central bank took measures to boost liquidity in the financial market and avert a possible default by the real estate group.

We saw almost little to no reaction to disappointing manufacturing data from the US, Eurozone, the UK and Japan.

Also read: Evergrande misses payment to staff, factory suppliers: Report

Market nerves remained stable even as China's state planner hinted at more action to combat commodity price rises.

Overall, mixed movement in commodities shows that market players are still unconvinced about the Fed’s monetary tightening, while uncertainty persists about the Chinese economy.

Central bank comments, economic numbers and developments in China are likely to remain in focus in the near term and volatility persist.

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