Commodities may remain volatile with focus on central banks, global growth, China virus situation

Commodities ended a volatile week on a mixed note as market players assess central bank stance as well as global growth outlook. Geopolitical issues also caused some nervousness in the market.

In previous two weeks, we saw a general shift out of the safety of the US dollar index to riskier assets like commodities and equities. We saw a break from this trend this week as the US dollar index turned choppy and growth concerns intensified.

Gold is among the best performers as it tested a one-month high on back of a choppy US dollar and lower bond yields. Industrial metals were mixed as growth worries dented demand outlook. Zinc, however, managed to scale a six-week high on Europe’s energy crisis. Crude oil was among the worst performers as it slumped to February lows on demand uncertainty.

Comments from Fed Chair Jerome Powell last month indicated that the central bank is set to take a meeting by meeting approach. Fed’s open ended stance has caused market players to look at US economic data and central bank comments to determine next move. Fed uncertainty has caused choppiness in US dollar.

Mixed economic data highlights increasing stress in the economy and makes a case for Fed to slow down. However, a number of Fed officials indicated that getting inflation under control is still a priority and rates hikes may continue.

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The US dollar turned mixed also as market players assessed monetary policy stance of other central banks who are also grappling with higher inflation and slower growth. Bank of England raised interest rate by 0.5 percent in line with expectations. BOE has been raising interest rate by 0.25 percent since December last year and decided to fasten the pace of rate hikes with inflation still out of control. BOE however rattled global market by warning that the economy may fall into recession.

Amid other central banks, RBI raised interest rate by 0.5 percent, marking its third consecutive hike, bringing the rates to pre-COVID levels. RBI however retained growth and inflation forecasts. Brazilian central bank also raised interest rate by 0.5 percent to the highest since 2017. Brazil has continued with rate hikes since March 2021 to control inflation but there are no signs of a pause yet.

Along with mixed trade in US dollar, commodities struggled also on demand concerns. Mixed economic data from major economies highlights increasing challenges while China’s struggle with virus spread has mired outlook for the economy. The southern Chinese city of Sanya, imposed lockdown measures in most parts of the city to limit the virus spread. While most central banks have warned about slower growth, BOE is forecasting the economy to shrink in the last three months of this year and keep shrinking until the end of 2023.

Geopolitical issues also caused some nervousness. Tensions between US and China rose as US House Speaker Nancy Pelosi visited Taiwan. While there has been no direct confrontation between US and China, China fired missiles near Taiwan as part of huge military drills following the visit. The US condemned China’s missile launches and urged Beijing to decrease tensions.

Commodities saw a brief rebound in second half of July but seems to have lost momentum amid growth worries and choppiness in US dollar. We may see volatility continuing with focus on central banks, global growth as well as China’s virus situation. The next major event is US inflation data which may give further direction to Fed’s monetary tightening debate.

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