Even as the global policy context is becoming increasingly complex and countries are struggling to balance growth and inflation, last week saw central banks of three of world’s large economies easing monetary policy.
While the European Central Bank cut rates by 25 basis points, in China, the People’s Bank of China (PBoC) eased its policy by cutting the deposit rate by 25bp and the lending rate by 31bp. Bank of England expanded its asset purchase programme by £50 billion, keeping policy rates on hold at 0.5 per cent.
Elsewhere, commodity markets were disappointed by the lower than expected US non-farm payrolls data which rose 80,000 in June. According to experts, this is the third disappointing data point on payrolls data with the unemployment rate remaining at 8.2 per cent.
No wonder the markets’ reaction was one of concern. Many assert that the Fed will have to show greater willingness to act on slowing growth. Interestingly, the timing of the PBoC decision was broadly unexpected. So market participants have to closely look for signs of policy changes that will affect market sentiment and commodity prices.
In precious metals, events in Europe led the price action with gold scaling back above $1600 an ounce, but over the week, it was down 0.7 per cent. Clearly, the haven status of the yellow metal continues to remain tested.
Platinum gained 1.5 per cent and silver 0.9 per cent. CME has cut margins on silver, copper and palladium futures in response to recent price declines and lower liquidity. Last week, silver saw a large increase in speculative short positions.
Agricultural prices have buoyed over the past week as persistent hot and dry weather in the US Midwest remains the focus, driving grain prices and setting sentiment. Despite higher acreages, both corn and soyabean crops run the risk of a yield decline. It is now a truly weather-driven market.
The big question is whether there will be further quantitative easing by the US Fed. Q3 is often a period of weaker demand for commodities in the northern hemisphere because of the summer season. So, price performance is likely to remain subdued.
Gold: In London on Friday, the gold PM Fix was $1,587/oz, down from the previous day’s $1,604/oz. Silver fell more sharply (3.6 per cent) to Friday AM Fix of $27.32/oz versus $28.33/oz the previous day.
Gold demand from the world’s largest importer and consumer India remains lacklustre with record prices considerably slowing physical purchases. The benefit of a lower dollar price abroad is not available to Indian consumer because of a weak rupee. The situation is unlikely to change anytime soon.
Volumes traded on the Shanghai Gold Exchange have also softened to below the monthly and annual average. Gold bulls are once again pinning hopes on further quantitative easing.
According to technical analysts, within the context of the mid-year range for gold, buying on dips is preferred. A break above $1641 will signal further upside toward the $1700 area. In silver, above $30 is needed to take the pressure off the $26 area. The medium term outlook is neutral.
Metals: The market is still in the grip of uncertain sentiment. Easing of policy rates should prove supportive, especially in China where government policy is now tilted towards growth rather than inflation control.
Anecdotal evidence suggests the sentiment is distinctly bearish. The big question therefore is whether there will be a firm sequential rebound in Chinese growth in the second half of this year. There is some weakness in construction and related sectors, which has to change. Only then will prices improve.
In the near-term, prices will remain range-bound until solid evidence of sustained demand is available. On Friday, LME cash copper was $7,535/t and aluminium $1,863/t.
According to technical analysts, resistance near $7900 means focus lower for copper. A move below $7450 would signal a re-test of the $7215 lows.
Expect selling interest near $2200 in aluminium to provide a cap. The next targets could be $1825 and $1775. The medium-term outlook is bearish.
Crude: The market was somewhat buoyant last week with Brent rising to $100 a barrel. Some signs of tightening in the oil market balances are emerging.