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Next major trigger for commodities may come from Fed comments in Jackson Hole Symposium

The sentiment for commodities has weakened however we are set to see volatile trade as market players keep an eye on trend in US dollar as well as development relating to China.

August 20, 2022 / 06:47 AM IST

Commodities scaled fresh highs earlier this month but seem to have lost some momentum amid renewed strength in the US dollar and increasing growth concerns.

Gold rose sharply and scaled the key $1,800 per troy ounce level but saw its first decline in five weeks. Zinc was leading the industrial metals sector for last few weeks and tested June highs but has now come off the highs. Crude oil witnessed slightly divergent trend as it slumped to January lows but has recovered nearly 5 percent from the lows.

The recent upward momentum in commodities came to a halt as the US dollar index bounced back. The US dollar index has tested 1-month high and posted its second weekly gain in three weeks.

The US currency has struggled in last few days amid increasing debate about Federal Reserve's monetary policy. The Fed raised interest rate by 0.75 percent in July similar to the hike seen in the previous meeting. Fed's pause triggered a debate if the central bank may slow down due to negative impact of rate hikes on economic activity or may continue with aggressive moves to control inflation.

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Minutes of July meeting were released this week and highlighted the ongoing debate between inflation and economic growth. As per the minutes, Fed officials saw a need to reduce the pace of interest rate increases at some point and warned against over tightening but also flagged the risk of inflation becoming entrenched.

Mixed comments from the Fed officials also highlights increasing uncertainty. St. Louis Fed President James Bullard said he is leaning toward supporting a third straight 75-basis-point interest rate hike in September. Meanwhile, Kansas City Fed President Esther George said pace and endpoint of rate hikes still a matter of debate.

The US Fed has raised interest rate aggressively and has now entered an indecisive phase as it considers the impact of the moves so far while also keeping focus on getting inflation under control and avoiding a major economic slowdown. The Fed's open ended approach means we may see volatility continuing as market players react to economic numbers and central bank comments to determine the next move.

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The US dollar has got a boost also on safe haven buying amid increasing concerns about European economies and China and increased geopolitical tensions. Europe is facing a severe power crisis due to increased demand and reduced natural gas supply from Russia and US and this threatens to impact economic activity. Higher inflationary pressure has also dented outlook for the economies. Data released this week showed that UK consumer price rose at the fastest pace in 40 years while Euro-zone inflation was confirmed at record high pace last month.

China has been under pressure as virus related restrictions hampered economic activity while property sector remained under stress. Rising power prices has added to concerns about health of the economy. China central bank's surprise move to cut key lending rate was also seen as a sign of stress in the economy.

Geopolitical tensions between US and China are high as China has opposed the proposal of trade talks between US and Taiwan. Adding to it, Indonesia has announced that Chinese President Xi Jinping and Russian President Vladimir Putin will attend the G20 summit on the resort island of Bali this November.

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Commodities in general were also pressurized by demand concerns amid mixed economic data from major economies, China's struggle with the virus spread and energy crisis in Europe and China. Some commodities like zinc, aluminium rallied initially on concerns that power crisis may hamper supply however price slipped back as demand concerns outweighed supply risks.

The sentiment for commodities has weakened however we are set to see volatile trade as market players keep an eye on trend in US dollar as well as development relating to China. The next major trigger may come from Jackson Hole Symposium where Fed Chairman’s comments will be watched for more clarity on monetary policy. Manufacturing and services PMI from US and Europe may also impact demand outlook.

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Ravindra Rao is the Head - Commodity Research at Kotak Securities.
first published: Aug 20, 2022 06:47 am