Monday, November 28, 2022

Commodities get out of the way behind the US dollar, but the challenge of increasing cases of COVID-19 remains.

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After days of range bound and directionless movement, commodities have shown some signs of life amid continued weakness in the United States Dollar and continuing optimism about the US and Chinese economy.

Gold, which had been struggling in the range of $ 1,670-1,750 an ounce for the past few weeks, has hit the highest level since February 26 and has been tested. Crude oil, which has been in the range of $ 58-62 per barrel for the last few days. Now went close to $ 64 per barrel. Copper, which was held in the range of close to $ 9,000 per ton, has now tested the highest level since late February.
The biggest factor supporting commodities is weakness in the US dollar. The US dollar index has hit a four-week low as the US economy expects bond yields and the Fed’s dovish stance to decline. Fed officials, including Fed Chairman Jerome Powell, have repeatedly mitigated inflation risks, while the interest rate may remain low for long periods of time.

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While the US equity market rebounded and the US dollar fell to the Fed’s dovish stance, bond yields remained high. The Fed now feels that bond market players are also confident that rates may not rise soon and this has led to an improvement in bond yields. The 10-year bond yield has increased from January 2020 to a low of 1.53 per cent, up from 1.77 per cent.

Commodities have also benefited from optimism about the US economy on the back of some upbeat economic readings. US retail sales grew 9.8 percent in March, the largest increase since May 2020. In the week ending 10 April, initial unemployment claims fell from 1,93,000 to 5,76,000, the lowest since 14 March 2020.
Despite some mixed economic readings and tempering in equity markets, optimism about the Chinese economy remains high. China’s Q1 GDP grew at a record pace of 18.3 percent compared to a year earlier, but was lower than the market’s growth of 19 percent; Retail sales expected 28.2 percent from the market’s solid pace beating 34.2 percent; Industrial production grew 14.1 percent in March-year compared to 17.2 percent lower than the market.

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While commodities are showing some positive momentum, there are challenges in the form of rising COVID-19 cases that have forced countries to impose strict restrictions that hinder economic activity.
India is looking at a record number of daily COVID-19 cases. Death toll is also increasing in places like France and Japan. Inflation concerns are also increasing and higher commodity prices may not help alleviate concerns about rising prices.

Market players are also awaiting greater clarity on the US infrastructure bill. According to a Reuters report, while the US Senate is expected to take its first steps on President Joe Biden’s $ 2.3 trillion infrastructure package next week, Senate Republicans are preparing a narrow resolution of less than one-third the size.

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