Ravindra Rao, Kotak Securities
Commodity prices at large ended the week higher driven primarily by a weaker US dollar. The US dollar index slumped to a 1-month low in reaction to Fed's monetary policy decision.
COMEX gold has jumped to a two-week high while crude oil has scaled above $73 per barrel and copper has tested mid-June highs.
As expected, the Fed kept interest and bond purchases unchanged. The Fed also maintained an upbeat outlook and noted that they were moving towards the start of tapering of asset purchases. The US central bank, however, did not give a clear timeline on tapering of asset purchases easing market nerves. Adding to it, the Fed Chairman noted that interest rate hikes are still distant despite optimism about the US economy.
Earlier in June, Fed rattled global markets by projecting the possibility of two rate hikes by 2023. This along with the rise in consumer price at the highest level since 2008 fueled expectations that the central bank may start tightening measures soon.
The Fed's decision this week however shows that the central bank is still in a wait and watch mode. This is justified amid increasing uncertainty caused by the spread of the Delta variant. A number of countries have tightened restrictions in wake of the rising virus cases while the US has also kept travel bans in place and recommended wearing of masks for the unvaccinated.
The Fed's cautious stance comes also at a time when other central banks like European Central Bank and Bank of Japan have maintained support for accommodative policy to boost growth.
Mixed US economic numbers also highlight challenges for the economy. US GDP rose 6.5 percent in Q2 after a downward revised 6.3 percent growth in Q1 however growth was much less than market expectations of 8.5 percent growth.
The change in Fed's stance shows that the central bank is unlikely to act soon and this may boost risk sentiment however we may continue to see volatility near key economic numbers especially labour and inflation. With an upbeat growth outlook and continuing rise in inflation, the Fed may struggle to justify its wait and watch approach.
With the Fed decision out of view, commodities may focus more on Chinese economic outlook and development relating to the virus situation. Concerns about China are high amid economic slowdown, rising virus cases and increasing regulatory crackdown and this pulled Chinese equities to November 2020 lows and market sentiments are unlikely to improve much soon. Virus concerns are high as Delta variant has spread across the globe and while we have muted reaction so far, continuing spread may force countries to take stringent measures.
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