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Volatility may continue in commodities as market may try to assess if optimism about China rises further

"Market debate about central bank monetary policy stance has intensified and we are seeing market players reacting to economic numbers and central bank comments to get more clarity about future stance," says Ravindra Rao, VP - Head Commodity Research at Kotak Securities

June 04, 2022 / 07:29 AM IST

Ravindra Rao, VP - Head Commodity Research at Kotak Securities

Commodities witnessed mixed trade in a holiday shortened week, however, US dollar's struggle to recover from recent lows and improved risk sentiment lent some support.

After a brief consolidation near $1850 per troy ounce level, gold has edged up and tested the highest level since early May. Industrial metals were largely positive, except aluminium, in the first few sessions of the week truncated due to holidays in the UK on Thursday and Friday. Crude oil moved in both directions but looked at another weekly gain.

Amid other assets, the US dollar index slipped to a five week low earlier this week but witnessed a sharp rebound before losing traction again. The US dollar’s struggle reflects increased debate about Fed’s monetary policy stance as market players look at US economic data, central bank comments as well as monetary policy stance of other central banks to get more clarity.

Equities were also volatile but still managed to see some gains amid optimism about China and increased debate about Fed’s monetary tightening. US Dow Jones Industrial Average index held on to the sharp gains noted a week ago while Chinese equities jumped to mid-April highs. Improved risk sentiment was also evident from losses in traditional safe havens like Japanese yen, Swiss franc, and US Treasury bond.

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Outlook for China improved amid upbeat economic data and easing of virus restrictions. China's official manufacturing and services PMI (purchasing managers index) data showed improvement in the sector, however, the readings still remained below 50 level. A reading below 50 shows contraction in the sector.

China's Shanghai city lifted virus restrictions after two months of lockdown paving the way for a pickup in economic activity. However, with China continuing with its zero COVID policy, it is likely that authorities may take a gradual approach to avoid any resurgence. We are already seeing a rise in cases in Shanghai which has led officials to increase testing capacity.

Market debate about central bank monetary policy stance has intensified and we are seeing market players reacting to economic numbers and central bank comments to get more clarity about future stance.

Fed minutes released a week ago fuelled debate that the central bank may slow down the pace of tightening to avoid any major negative impact on the economy. Comments from Fed officials in the last few days, however, show little sign that the central bank may change stance soon. Fed vice chair Lael Brainard said it was hard to see a case for a September pause in rate hikes.

Mixed US economic data, however, kept market players guessing. Upbeat consumer confidence and ISM manufacturing data strengthened the case for Fed’s monetary tightening, however, ADP jobs report noted a much smaller than expected growth in jobs.

Market expectations for European Central Bank's monetary tightening rose as consumer prices rose at a record pace last month, however, PPI data showed a slower growth in producer prices. A bigger than expected jump in Swiss inflation also added to expectations that the central bank may act.

We may see volatility continuing as market players try to assess if optimism about China strengthens further or not with focus on virus situation as well as stimulus measures to boost growth. Monetary policy stance will also remain in focus with ECB’s (European Central Bank) monetary policy meeting and US inflation data. ECB has taken a hawkish tilt as inflation is spiralling out of control but more clarity is needed about timing for rate hike. US inflation concerns may not subside unless there are clear signs of easing price pressure.

Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
Ravindra Rao is the Head - Commodity Research at Kotak Securities.
first published: Jun 4, 2022 07:29 am
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