Commodity markets await Fed meeting, economic data

G Chandrashekhar | Updated on October 29, 2019

In recent days, the global commodity markets covering energy products, major metals and agriculture have largely been subdued, with, of course, a few exceptions. However, a raft of economic data releases scheduled this week can change the picture. More importantly, the FOMC meeting of the US Federal Reserve on Wednesday and Thursday has the potential to trigger significant moves.

Market participants will, of course, focus on the Fed. There is widespread expectation of a further rate cut; the third in a row if it materialises. For all intents and purposes, a rate cut has already been priced in. However, more important will be the message that comes from the Fed Chair’s press conference ― any indication of the possibility of a further rate cut will positively impact commodity prices, especially of precious metals.

If the Fed were to do the unexpected, that is, put the rates on hold, there is likely to be significant reaction in the commodity markets. Gold, in particular, could come under pressure and reverse the small gains it has made of late.

From the US, October employment report as well as ISM manufacturing index will be announced this week. Chinese October PMI is also scheduled this week.

Crude oil (Brent) has gained $2 a barrel in the last few days, trading currently at $61 a barrel, amid talk of further production cut by OPEC and slowing US shale output. Speculative long positions on the bourses have increased. But concerns over marked slowdown in economic activity in major economies continue to weigh on the energy market. The positive correlation between economic growth and energy consumption is, of course, well recognised.

Gold is currently trading a tad above the psychological level of $1,500 a troy ounce, having gained 1 per cent in the last one week. Again, speculative investors have increased their long positions. But the metal risks a correction as two of the world’s largest importers and consumers ― China and India ― face subdued demand conditions.

Gold shipments to China and India during September show a sharp slump. Higher prices caused by currency depreciation and customs duty are seen hurting demand growth. India is seeing a clear demand compression as evidenced by lacklustre jewellery sales during the festival season.

As is well known, sentiment in the industrial metals market has been hampered by the ongoing tariff conflict between the US and China. No less important are global growth concerns that are weighing on the base metals market, exacerbated by the strength of the US dollar.

Steel production contracted in September following temporary shutdowns in China and Japan, but is expected to bounce back in the coming months. Copper and nickel have had a breather with prices moving up in the last few days. Production challenges in Chile, Peru and Indonesia boosted copper prices by close to $100 a tonne, while the nickel market moved because of mine closure.

Agricultural commodity prices in general have been weak, thanks to expectations of large harvests in EU and Black Sea region. Corn and soybean rates have edged lower in the last one week. The wheat market is threatened by drought conditions in Australia and Argentina, but adequate supplies from other origins are likely to contain any price fallout.

Investors have to watch out for market-moving developments this week impacting precious metals in particular.

The author is a policy commentator and commodities market specialist. Views are personal

Published on October 29, 2019

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