The next major event for commodities is Fed’s monetary policy decision in early May but until then commodities may get impact by development relating to Russia-Ukraine war as well as China’s efforts to get virus spread under control and support economic growth.
Ravindra Rao, VP – Head Commodity Research at Kotak Securities
Commodities ended mixed to negative this week, a break from the recent upward momentum. While there has been no major change in the Russia-Ukraine fighting, China’s virus situation and the Fed’s monetary policy stance, commodities came under pressure as market players shifted focus to equities.
In the last few weeks, market players shun equities amid the prospect of higher borrowing costs and focused on safe havens like gold amid geopolitical tensions and growth worries and bought commodities amid inflation concerns and supply risks.
We, however, saw a slight shift in investor interest this week and equities attempted some pull back. Equities gained as market players assessed corporate earnings results and economic numbers to gauge if the economy is strong enough to withstand higher interest rates.
US DJIA index tested the highest level since early February and is set for its first positive weekly close in four weeks. On the other hand, gold futures topped $2,000 per troy ounce earlier this week before slipping to two-week lows; NYMEX crude tested three-week high but plunged sharply towards the $100 a barrel level; industrial metals also struggled to hold on to the gains.
Stability in equity markets also reduced the safe haven demand for the US dollar index, which corrected after testing March 2020 highs this week. Bonds also saw some buying interest after recent sell-off and this helped bring the US bond yield lower from December 2018 highs set earlier this week.
It is still early in earnings seasons, however, some upbeat results have kept market players hopeful that the economic growth may continue. As per Bloomberg analysis, of the 87 S&P 500 companies that have posted results, about 80 percent have beaten estimates.
On the data front, new US home construction rose in March to the highest level since 2006, reflecting strength in the housing market. Continuing jobless claims, which represent the number of people already receiving benefits, stood at the lowest level since 1970, reflecting tighter labour market.
However, this shift from commodities to equities did not continue for long as hawkish comments from central bank officials rekindled worries about higher interest rates. Fed officials have been expressing support for faster rate hikes and market players have already factored in the possibility of a 0.5 percent hike at the upcoming May meeting.
Comments from Fed Chairman Jerome Powell further cemented market expectations. He said that a half-point hike will be on the table for the May meeting.
Other central banks are also under pressure to act to get inflation under control. European Central Bank (ECB) has so far maintained a cautious stance given the uncertainty relating to the Russia-Ukraine war, however, some officials have expressed willingness to act. As per Reuters report, ECB Vice-President Luis de Guindos said ECB should end its stimulus programme in July and could raise interest rates that same month, in September or later. Bank of Canada has also raised prospect of bigger rate hikes with inflation out of control.
Commodities lost their upward momentum, however, there are still positive factors in the form of supply risks relating to Russia and inflation concerns which may continue to support prices. The next major event for commodities is the Fed’s monetary policy decision in early May but until then commodities may get the impact by development relating to Russia-Ukraine war as well as China’s efforts to get virus spread under control and support economic growth.Disclaimer: The views and investment tips expressed by investment 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.
Source:moneycontrol.com