Headwinds from US banks fallout, debt default fears to keep investors anxious

Commodities

Ravindra V. Rao

The widely expected yet highly anticipated decision came from the FOMC May meeting on expected lines but failed to calm investors' nerves as banking sector woes resurfaced. In the post-policy comments, Chair Jerome Powell attempted to reassure markets saying that the US banking system is sound and resilient.

In the May FOMC meeting, Federal Reserve raised the fed funds rate by 25 bps to a range of 5 - 5.25 percent, the highest level since September 2007. While the omission of “the Committee anticipates that some additional policy firming may be appropriate” for the Fed to accomplish its 2 percent inflation target, from the May FOMC statement, boosted bets of a rate hike pause, Fed Chair was quick to dismiss hopes of a rate cut any time soon.

COMEX Gold posted over 1 percent weekly gain, the best since mid-March, buoyed by both safe-haven demand and a softer dollar. Jitters regarding the deepening rout in US regional lenders and the US debt ceiling standoff added further spark in gold, which jumped to a record high of Rs 61,845/10 gms on the MCX and $2085.4/oz on the COMEX, within striking distance of all-time high of $2089.2/oz hit during COVID. Silver too gained momentum and hit a one-year high of $26.43/oz, completely ignoring the decline in industrial metals.

Also read: Debt default, banking crisis key concerns for US economy, says economist David Rosenberg

Related stories

Ravindra Rao

Head - Commodity Research|Kotak Securities

• 
  US labour report to determine second quarter sentiment for commodities next week
• 
  Commodity markets to focus on Fed Chair's speech, US PCE price index, Q3 GDP numbers this week
• 
  Monetary policy meetings in US, Japan, UK to set the tone for commodity market movements next week

We are probably at peak Fed funds rate and might see a pause during the June FOMC meeting, which is a major trigger for bullions. On the price action front COMEX Gold needs to take out the identical triple top resistance near $2090/troy ounce. If that happens the bulls might target $2150/troy ounce. However, if the bulls fail in taking out the resistance then corrective dips might attract buying.

WTI Crude oil posted a 7 percent decline, its third consecutively weekly loss, while base metals extended drop as fears of a US recession and more signs of a patchy recovery in China weighed on risky assets. Declining refinery margins in Asia and falling US gasoline demand only exacerbated losses in oil.

On the technical front, WTI Crude oil is trading close to the 200-period simple moving average support near $66/bbl. A break below the said support on a daily closing might pull the price further lower towards $62/bbl. If bulls hold the support, then a bounce towards $72/ bbl can’t be ruled out.

At present, Investor confidence remains fragile as regional lenders do have a lot of deposits above the $250,000 Bank Account Insurance limit, i.e. unprotected by the Federal Deposit Insurance Corp (FDIC). Besides, unprecedented fears of a debt default linger if Congress does not raise or suspend the borrowing limit in the next few weeks.

Further, worries that ongoing banking turmoil may lead to tighter credit conditions, reinforce bets of a deeper recession. Having said that, it has also pushed odds of rate cuts higher, with CME Fed funds futures implying a 47 percent probability of a 25 bps cut as soon as July.

Besides, markets now look forward to the monthly Labor Department report, which is expected to show a pullback in hiring and a slight uptick in the unemployment rate last month while UK monetary policy and US CPI will be in focus next week.

Disclaimer: The views and investment tips expressed by 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.