By Ravindra Rao
Fed concluded its two day meeting and decided to keep interest rates unchanged at 0-0.25 percent. Fed economic projections however pressurised both equity markets and US dollar. Fed is projecting US GDP to fall by 6.5 percent in 2020 followed by a 5 percent growth in 2021.
Meanwhile, Fed officials see interest rate remaining at record low level till at least 2022. Fed decision and projection indicate that the central bank may continue with lower interest rate due to the risks to US economy. Fed’s stance is negative for US dollar.
Equities and commodities have fallen on growth concerns. However, Fed’s dovish stance could trim some losses.
COMEX gold has gained more than 1 percent to trade near USD 1745/oz after a 0.1 percent decline yesterday. Gold trades higher supported by weakness in US dollar and equity markets post Fed decision. Fed kept interest rates unchanged as expected. However, its downbeat growth forecasts dampened risk sentiment pressurising equities and increasing gold’s safe haven appeal.
Fed’s forecasts added to downbeat growth outlook released by OECD and World Bank in last few days. OECD, in its update released Wednesday, forecasted that global economy would contract 6.0% this year before bouncing back with 5.2 percent growth in 2021. Meanwhile, US bond yields and US dollar index came under pressure amid Fed dovish stance.
Fed’s economic projections show that interest rates are likely to remain near record low levels until at least 2022 even as economic activity is expected to pick up next year. The US 10-year bond yield fell from 0.84 percent to 0.75 percent while US dollar index slumped to 3-month low near 95.7 levels.
ETF inflows also show pick up in investor interest. Gold holdings with SPDR ETF rose by 4.89 tonne to 1129.495 tonne, first rise after four consecutive sessions of outflows. While gold has recovered on global growth concerns, slow recovery may also hamper consumer demand especially in countries like India and China.
Gold has bounced back after taking support near USD 1750/oz and has been supported by weakness in equity market and Fed’s dovish stance. While momentum looks on the upside, price is yet to break past the USD 1750/oz level hence we recommend waiting for a corrective dip before creating fresh long positions.
COMEX silver has surged more than 2 percent to trade near USD 18.2/oz after a flat close yesterday. Silver rallied sharply today on back of gains in gold amid Fed’s dovish monetary policy stance. However, weighing on silver are concerns about industrial demand amid downbeat growth outlook for US and global economy.
ETF investors moved to sidelines after recent outflows. Silver holdings with iShares ETF were unchanged yesterday at 14707.27 tonne. Silver may witness choppy trade as it counters strength in gold against demand concerns hence we recommend waiting for a corrective dip before creating fresh long positions.
NYMEX crude has slipped more than 2 percent to trade near USD 38.7 per barrel after a 1.7 percent gain yesterday. Crude oil along with other commodities came under pressure amid demand concerns on back of downbeat growth forecasts for US and global economy. Mixed economic data from major economies reflects the challenges to global economy. Also weighing on crude price is mixed inventory report.
US EIA noted a 5.72 million barrels increase in US crude oil stocks as against market expectations of 1.7 mn bbl decline. The buildup was however less than the 8.4 mn bbl rise reported by API. Crude stocks rose amid higher imports and lower exports and now stand at a fresh record high level of 538.1 million barrels. EIA report also noted a bigger than expected rise in gasoline stocks but a smaller than expected increase in distillate stocks. US crude production fell for the tenth consecutive week to 11.1 million barrels per day, lowest since Oct.2018. However, supporting crude price are supply concerns relating to Libya.
As per Bloomberg reports, the Sharara field, the nation’s largest, and the El-Feel deposit are offline again following incursions by armed groups, only a few days after it had restarted operations. OPEC and allies agreement to extend production cut is also supporting crude price even if it was largely expected. Also supporting price is weakness in US dollar amid Fed’s dovish stance.
Crude oil has been struggling for direction ever since breaking past the USD 40/bbl. Weakness in equity market and higher US supply has pressurized prices however we may not see a sustained decline with increasing producer’s efforts to reduce the glut in global market.
(The author is VP- Head Commodity Research at Kotak Securities)
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