Commodities rally in Q3 but uncertainty lies ahead: Ravindra Rao

The year 2020 has been an eventful one so far as we witnessed one of the biggest economic and health emergencies caused by the outbreak of COVID-19 and it is unlikely that it may end on a quiet note with so many uncertainties confronting the world.

Financial markets have also been on a rollercoaster ride reflecting the uncertainty caused by COVID-19 and are bracing for a tumultuous fourth quarter

Most equity markets and commodities ended the Q3 on a positive note benefitting from stimulus measures, hopes of a vaccine and weakness in the US dollar.

Gold surged to record high levels in August but witnessed a sharp correction in September and yet ended with a gain of about 4 percent in Q3; copper gained about 10 percent and tested the highest level in two year; crude oil underperformed but still managed to end with a gain of about 2 percent. Commodities in general were supported by weakness in the US dollar which slipped over 3 percent last quarter.

While the third quarter ended on a positive note, September’s performance flashed some warning signs. Gold and some other commodities came under pressure last month while equities fell sharply and the US dollar index bounced back from multi month lows.

The shift in asset classes last month shows renewed risk aversion as there are many uncertain factors. Firstly, the virus outbreak continues to remain out of control and market players are worried about the resurgence of cases in Europe and some parts of the US. While countries want to avoid complete lockdowns, market players are wary that if the virus spread continues governments may be forced to take strict measures. A lot of progress has been made on the vaccine front however there is still uncertainty about when a vaccine could become available.

Amid other uncertain factors is the delay in US stimulus plan and Brexit uncertainty. US policymakers have intensified efforts to reach a consensus on additional fiscal stimulus but uncertainty will persist until a deal is reached. The UK and European Union are struggling to make headway on post-Brexit trade terms while Britain's proposed internal market bill has added to uncertainty. Meanwhile, US-China tensions are simmering, threatening the partial trade deal signed earlier this year.

Adding to it is uncertainty relating to the outcome of US Presidential elections. US President Donald Trump and Democrat nominee Joe Biden had their first televised debate this week where they had heated discussion over various issues like healthcare, economy, COVID-19 etc. The debate has added to uncertainty about election outcome with market players also wary about President Trump’s criticism about postal ballots.

Overall, financial markets have entered the last quarter on an unsteady footing and unless we get more clarity on major issues, volatility is likely to continue.

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