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Commodities may look at Fed interest rate decision, commentary, economic projections

Market players may look at economic projections to gauge how long Fed will continue to raise interest rate at current pace and what will be its impact on economic growth.

June 11, 2022 / 12:37 PM IST

Ravindra Rao, VP - Head Commodity Research at Kotak Securities

Continuing with the recent trend, commodities witnessed mixed trade this week but were pressurised by positioning of the Fed decision due next week, waning confidence about China, and increasing concerns about global economic growth.

It was a non-consequential week for gold as it held in a narrow range near $1,850 per troy ounce level as market players remained non-committal ahead of the Fed decision. Industrial metals came under pressure as optimism about Chinese economy waned with renewed virus concerns, while major agencies lowered global growth estimates. Crude oil jumped to March highs on tightness concerns but struggled to build on the gains amid volatility in larger financial market.

Amid other asset classes, the US Dow Jones Industrial Average index closed 4.6 percent for the week, while Chinese equities tested two-month highs. The US dollar index witnessed mixed trade. Safe havens like Japanese yen, Swiss franc and US Treasury bonds fell for the second consecutive week. Sell-off in traditional safe havens, choppiness in equity and commodity markets and gains in US dollar shows that market players are shunning assets for the safety of the US dollar.

Risk sentiment got a hit this week as major agencies lowered global growth estimates, central banks reaffirmed their monetary tightening stance while China faced a setback on its virus situation.

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World Bank lowered the global growth estimate for 2022 from 4.1 percent to 2.9 percent and also warned about stagflation risks. The Organisation for Economic Cooperation and Development (OECD) lowered its global growth forecast for 2022 from 4.5 percent to 3 percent and expects inflation in OECD countries to peak near 8.5 percent this year. The forecasts highlight the increasing challenges caused by the Russia-Ukraine war.

Central banks have taken a hawkish tilt amid increasing emphasis on controlling inflation. Tightening concerns rose further this week amid major moves by central banks. The Reserve Bank of Australia and The Reserve Bank of India announced a bigger-than-expected increase in key lending rates highlighting their urgency to act to get inflation under control.

European Central Bank's monetary policy meeting also showed a major shift in stance but failed to garner much reaction. Comments from ECB officials and inflation data had already fueled expectations that the central bank may raise interest rate soon.

In line with expectations, the ECB kept key lending rates unchanged and will end the bond purchase program on July 1. The ECB indicated possibility of a 0.25 percent hike at the July meeting and kept options for bigger moves if required. The ECB indicated that it could consider a bigger hike at the September meeting if the medium-term inflation outlook persists or deteriorates.

The Focus is now on the Fed decision next week. The Fed is largely expected to raise the interest rate again and maintain its tightening stance. Market players may look at economic projections to gauge how long Fed will continue to raise interest rate at current pace and what will be its impact on economic growth.

Commodities gained some footing in last few days as China lifted virus related restrictions, government took more measures to support the economy, economic data showed strength in the economy while government eased regulatory crackdown measures. Concerns about China however resurfaced as rise in virus cases forced Shanghai to lock down some parts for mass testing. China has stuck to its zero COVID policy and if it continues to use restrictions to control the spread, it may impact the pace of economic recovery.

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 11, 2022 12:37 pm
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