Ravindra Rao is Head of Commodity Research Kotak Securities
Commodities closed weaker this week amid persisting worries about the health of Chinese economy, rising virus cases and continuing debate about Federal Reserve's monetary policy. While commodities have come under pressure, equities are still holding firm with focus on economic growth. This divergent trend also shows that equities are seen as the preferred asset class.
China has been in focus for the last few days as regulatory crackdown on various sectors pressurized equity markets. After restricting activity in education, real estate, market players are now worried that the gaming sector may be targeted, however, there has been no fresh action so far this week.
Disappointing economic data fuelled concerns on slowdown in the economy. Manufacturing PMI in July rose at the slowest pace since February 2020. Concerns rose further as a sharp rise in virus cases forced authorities to tighten restrictions. China recorded the highest daily Covid-19 cases in its current wave while millions of people have been put under restrictions.
Virus cases are rising across the globe including the US and this has forced countries to take action to limit the spread. As per John Hopkins data, global virus cases have surpassed the 20 crore mark. If the virus situation worsens further, stricter restrictions may be imposed hampering economic activity.
Uncertainty about Fed's monetary policy also weighed on commodities. The Fed last week kept monetary policy unchanged while Fed Chair Jerome Powell eased tightening concerns by stating that rate hikes are far away.
Debate about how soon the Fed may start monetary tightening resurfaced this week amid hawkish comments from some Fed officials and strong NFP print from US. Fed's monetary policy is also in focus as other central banks act to control inflation. The Bank of England kept monetary policy unchanged this week but outlined a plan to roll back support measures in coming years.
Brazilian central bank raised the interest rate by 1 percent while projecting possibility of more rate hikes while Australia and New Zealand also maintained hawkish tone. Fed's hawkish comments and strong NFP print has helped US dollar index recover from 1-month low set last week putting further pressure on commodities.
The mixed trend seen in commodities in the last few days shows lack of confidence in the market. This trend may continue until we get more clarity about the virus situation, China's economic health and regulatory crackdown and Fed's monetary policy. US economic data and Fed comments will be watched for more clarity about Fed's monetary policy.
US Inflation data would be the major focus next week. China's inflation, retail sales and industrial production data due next week will also give more clarity about the health of the economy.
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