West pressure on Russia may not only impact risk sentiment but also supply outlook for commodities

The US dollar got a further boost as comments from Russian president reminded that the Ukraine war is far from over. Russian president announced a partial mobilisation of reservists and made a veiled threat to use nuclear weapons.

September 24, 2022 / 01:47 PM IST

Ravindra Rao, VP - Head Commodity Research at Kotak Securities

Commodities seem to have braced the wave of central bank meetings but closed another week lower highlighting weaker market sentiment.

Gold remained under pressure on back of higher yields and firmer US dollar but managed to hold above the recent April 2020 lows while silver outperformed once again. Industrial metals were largely under pressure on weaker risk sentiment and growth worries which offset supply risks relating to Russia. Crude oil is set for a fourth weekly loss as demand concerns and monetary tightening countered supply risks.

The US dollar continued to play spoilsport for commodities. The US dollar index jumped to fresh 2002 high before losing some momentum later in the week. The US currency benefitted from Federal Reserve's monetary tightening stance and safe haven buying amid global growth worries and geopolitical tensions.

The week belonged to central banks and while most stuck to market expectations, the key takeaway was that central banks are under pressure to act to get inflation under control.

The first trigger came from the Fed as the US central bank raised interest rate by 0.75 percent for the third consecutive time matching market expectations. Also in line with expectations, the US central bank maintained a hawkish stance with priority on getting inflation under control.

Market risk sentiment, however, got a jolt from Fed projections. The US central bank lowered its 2022 GDP growth estimate from 1.7 percent to 0.2 percent highlighting the impact of monetary tightening on economic growth. The Fed also raised the end of the year interest rate projection from 3.4 percent to 4.4 percent. This means that the central bank expects additional 1.25 percent hike by the end of the year.

With just two more meetings due this week, that means there is a possibility of another 0.75 percent hike at the November meeting. Fed projections also show that there may not be any interest rate cut before 2024. This disappointed market players who were expecting the Fed to cut rates next year.

The US dollar got a further boost as comments from Russian president reminded that Russia-Ukraine war is far from over. Russian president announced a partial mobilisation of reservists and made a veiled threat to use nuclear weapons. This announcement came just days after Russia faced some setbacks in the war. While Russia-Ukraine tensions dented risk sentiment, some commodities benefitted from renewed supply worries.

The US dollar, however, lost momentum amid efforts to support other currencies. For the last few days, Japanese officials expressed their concern about weakening yen and indicated their willingness to act. The Japanese yen plunged to a fresh 1998 low after Bank of Japan decided to keep monetary policy unchanged to support the economy. Following this, Japanese authorities intervened to support the currency.

The US dollar stalled also as other central banks stepped up efforts to control inflation. Bank of England raised interest rate by 0.5 percent in line with expectations while Swiss National Bank matched Fed's move and raised interest rate by 0.75 percent. A number of other central banks ranging from South Africa, Indonesia, the Philippines, Norway, and Taiwan also raised interest rate to control inflation.

The general 'buy the US dollar, sell riskier assets' trend has continued for weeks and there is little chance we may see a break out of it. Market players may continue to look at economic numbers and central bank comments to determine future moves. A number of Fed officials are due to speak in coming days and their comments will reflect upon central bank’s latest decision as well as future move.

With Russia's statement, Russia-Ukraine war has also come in focus. Until there is a resolution, western countries may continue to keep pressure on Russia which may impact not only the risk sentiment but also supply outlook for commodities.

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Ravindra Rao is the Head - Commodity Research at Kotak Securities.
first published: Sep 24, 2022 01:47 pm