Global commodity markets buffeted by macro concerns

The global commodity markets, in general, and metals market, in particular, are currently groping for direction, buffeted as they are by a clutch of uncertainties. Macroeconomic concerns have not waned and are currently dictating the direction of prices.

The Organisation for Economic Co-operation and Development (OECD) leading indicators have pointed to a slowdown in most major economies. Europe, the US and China are currently the focus of global attention, and whatever is happening in these countries does not inspire much confidence about robust growth prospects.

The European sovereign debt crisis is far from resolved. What is clear is the fiscal austerity that governments will be forced to impose. The US debt ceiling crisis may have blown over fortunately, but employment numbers are far from inspiring — add to these the supply disruptions caused by the tsunami in Japan, and severe curtailment of economic activity.

In emerging markets such as China and India, cost pressures are telling. High prices of crude and growth-oriented commodities such as base metals over the last few quarters have resulted in inflation which the monetary authorities are fighting in the only way they know best — tightening credit and raising interest rates.

Asian majors China and India offer two prime examples of continual monetary tightening to fight inflation. Of course, there is the possibility of a review of the monetary policy in emerging economies simply because of the adverse effects of tighter credit on growth.

Quantitative easing

Will there be a third round of quantitative easing (QE3) in the US? If growth signals do not turn positive, there is every possibility of QE3. What QE1 and QE2 did to commodity prices is well known. There could be a repeat any time soon. In the event, all attempts to contain inflation will have to be redoubled.

So, the big question is, what does the immediate future hold for the commodity markets, in general, and metals market in particular? Will a benign macro picture emerge during the rest of the year? What would trigger it? The slowdown in growth is real. Will it worsen or just stay as a soft spot for some time before improving?

The current uncertain conditions are highly supportive for precious metals, especially gold as safe haven investment and hedge against inflation. The unabated sovereign debt problem and possibility of QE3 means that gold prices have the potential to rise further to test newer highs. Silver, despite weak fundamentals, is likely to piggyback on gold and benefit from its price movement.

Global base metals market is facing a tricky situation. China is the mover and shaker of the world base metals market. In China, there has been de-stocking as a result of tightening credit and possibly in anticipation of a slowdown. If the Asian major reverses or even stalls the credit squeeze cycle, emergence of restocking demand would propel base metals prices higher.

On the other hand, if slowdown persists or worsens and in response to a possible QE3, if the monetary authorities (in a kneejerk fashion) over-tighten credit, prices could come under pressure.

The regulatory risks the market faces are not unreal. A stringent regulation of speculative capital flows into the derivatives market can potentially drive prices down. Overall, the global commodity markets seem to be facing a certain uneasy calm. Is this the calm before the storm?

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