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Commodities register another gloomy week amid higher US dollar; to focus on US economic numbers, central bank comments

Moneycontrol logo Moneycontrol 2 days ago Ravindra Rao
Commodities register another gloomy week amid higher US dollar; to focus on US economic numbers, central bank comments © Himangshu Watts Commodities register another gloomy week amid higher US dollar; to focus on US economic numbers, central bank comments

It was another disappointing week ended May 13 as commodities were bashed by a general flight to safety and the US dollar continued its unchallenged rise.

Market risk sentiment continued to remain pressurised by prospect of higher interest rate, concerns about higher inflation, China's struggle to get virus spread under control and continuing Russia-Ukraine fighting.

Just a week after the US Federal Reserve rattled the global market by raising interest rate by 0.5 percent and projecting more rate hikes, US inflation data and comments from Fed officials kept market fear high that the central bank may tighten aggressively to get inflation under control.

US inflation data released this week showed some easing in consumer and producer prices, however the readings were still above market expectations and could not ease market nerves about price pressure. US consumer prices rose 8.3 percent on the year in April, a slight improvement from 8.5 percent growth a month ago, but higher than market expectations of 8.1 percent growth.

On similar lines, US producer prices rose 11 percent on the year in April after a 11.5 percent growth a month ago but was higher than market expectations of 10.7 percent growth.

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A number of Fed officials spoke this week and the general consensus is that rate hikes may continue at current pace and while a 0.75 percent rate hike is not being discussed actively, it is still a possibility. Latest comments came from Fed Chair Jerome Powell who maintained his expectations of 0.5 percent rate hike at each of Fed’s next two policy meetings while leaving open the possibility it could do more.

With increasing market expectations of aggressive monetary tightening by the Fed, the US dollar index gained further ground and tested a fresh 2002 high. The US currency has also benefited from safe haven buying amid increasing challenges for the global economy.

Also Read | Do not chase what is looking very safe now: White Oak Capital's Prashant Khemka

Inflation data from other major economies also highlighted persisting price pressure, a major challenge for economic growth. China's consumer price rose 2.1 percent on the year in April as against the forecast of 1.8 percent growth. Consumer price in India rose 7.79 percent in April, the fastest pace in almost eight years, as against market expectations of 7.5 percent growth; Brazilian consumer price rose 12.13 percent on the year in April as against forecast of 12.07 percent.

Global economic outlook is further hampered by increasing concerns about the Chinese economy as it struggles to bring virus spread under control while virus related restrictions are hampering economic activity. Reflecting uncertainty in the market, we saw a sharp reaction to market rumours that Beijing is heading for a lockdown, a claim denied by authorities.

Russia-Ukraine tensions are also high as fighting has continued while there are no major efforts to resolve the dispute. The European Union's struggle to reach consensus over a proposed plan to ban Russian crude eased market nerves to some extent however this was countered by drop in Russian gas supply to Europe through Ukraine due to war related disruptions and Russia’s move to impose sanctions on a number of energy companies.

Overall, risk sentiment is quite weak currently and commodities and equities, which were performing quite well for the last few months, have come under selling pressure. This switch from riskier assets to cash (US dollar) may continue unless there are signs of improvement in China's virus situation or unless China announces measures to support the economy. China's industrial production and retail sales data next week will be keenly watched to gauge the health of the economy. With trend in US dollar one of the major price determining factors, we may also see market players focusing on US economic numbers and central bank comments.

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.

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