For commodity markets, the uncertainty will continue

High anticipation in the build-up to the Federal Reserve’s interest rate meeting in September had investors, traders and Wall Street betting on chances of an imminent decision on rates. The CME Group FedWatch, which tracks futures, showed that investors believed there was a 51 per cent chance of a hike on August 6, and this plunged to 23 per cent on September 17, the Fed meeting date.

In the latest meeting, Fed policymakers voted 9-1 to keep the federal-funds rate range unchanged — between 0 and 0.25 per cent — while taking notice of wild swings in global markets and weakness in the economies of the United States’ main trading partners.

The Fed cited global risks and downward pressure on US inflation from a high dollar and low commodities as reasons to stand pat. The Fed’s key rate has been near zero since the depths of the recession in late 2008.

Fed Chair Janet Yellen attributed downward pressure on near-term inflation to the recent drop in oil prices and further appreciation of the US dollar, as a result of which it will take more time for these transitory effects to fully dissipate.

Yellen added the Fed is looking for some further improvement in the labour market in coming months. The Fed took notice of recent market turbulence in China and the slowdown in emerging market economies.

Although grim concerns remain at the forefront, the Fed did sound slightly more optimistic about the US economy and raised its expectations for economic growth this year to 2.1 per cent from 1.9 per cent, and lowered its projection for the unemployment rate by the end of the year to 5 per cent.

Amidst these announcements, Yellen did not rule out rate hike at the meeting to be held in October, despite the fact that there is no press conference scheduled for that meeting at this time. After the meeting, the CME Group FedWatch, which is a key market sentiment indicator of a Fed rate hike, showed that the market thinks there is a 58 per cent chance of a hike in December 2015 and 65 per cent in January.

The year 2015 has seen the dollar index strengthening by around 5 per cent in anticipation of rate hike in the US, which depends on two prime factors — growth in the labour and housing market.

The Fed policy impact on the dollar’s weakness or strength was important for its own domestic conditions. However, the Fed now talks about the dollar’s strength, which has led to disinflationary pressures in the global economy.

Since commodities are mostly priced in dollars, the currency’s rise makes oil and gold expensive for holders of other currencies, and in turn, lowering the demand for the commodity.

On the contrary, the fall in oil, for instance, puts more money back in the pockets of consumers and businesses, which helps boost growth and reflate the economy in the longer-term.

For the time being, the probability of a rate hike seems to be delayed and the sentimental push has been provided by the US Federal Reserve. However, uncertainty prevails in the market as the rate-hike focus will now shift to the next meeting, to be held in October.

The anticipation of a rate hike will keep the commodities market volatile. Outlook Commodity fortunes can only be revived once the markets have a clear decision on the rate hike by the Fed.

However, the rate hike is not the sole factor to decide the price trajectory of commodities. The intrinsic factors that hold good for any commodity, such as supply and demand, geo-political disturbances, stability in the Chinese economy, a stronger dollar, more Iranian crude, high OPEC supplies and more crude output from the US, need a close watch in the case of crude oil.

For base metals, the Chinese slowdown remains the focal point of concern as efforts taken by the People’s Bank of China and the government have not sufficed to boost the flagging economy. As a result, demand seems to have plummeted while the supply side remains ample.

According to Yellen, low inflation and uncertainty in the global economy are transitory factors governing the price trajectory of all the asset classes, including commodities. Hence, it weakens the argument for a near-term rise in US interest rates.

The immediate concern is China and other emerging markets, where growth remains very fragile, which is not a very positive signal for global investors to put money back in these markets.

The writer is Director – Commodities & Currencies, Angel Commodities Broking Pvt. Ltd. The views are personal.