Hawkish comments from the Fed may further strengthen the dollar which may not bode well for commodities: Kotak Securities' Ravindra Rao

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Commodities witnessed strong gains this week despite the dollar strengthening and equities weakening as rising inflationary pressure drew investors, said Ravindra Rao, vice-president, head of commodity research, Kotak Securities.

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Inflation pressure has been rising globally for the last few months and the debate on price rise intensified this week amid sharp increase in crude oil rates and inflation data coming in from major economies, Rao pointed out.

Brent crude topped $89 per barrel this week for the first time since 2014 amid worries about a tighter market due to supply risks relating to Russia and the Middle East coupled with robust demand growth expectations despite increasing virus spread. With rising prices, crude oil may surpass $100 a barrel soon.

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UK consumer prices increased 5.4 percent from November’s 5.1 percent, the highest since March 1992. Inflation in the Eurozone climbed to a rate of 5 percent in December, the highest level since the single European currency was created, he highlighted. Japan’s core consumer prices rose 0.5 percent in December from a year earlier, increasing for a second month in a row at the fastest pace in nearly two years.

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With rising inflationary pressure, gold prices zoomed to two-month high but stopped short of the $1850 per ounce level. Other precious metals like silver, platinum and palladium also witnessed substantial gains.

Industrial metals also benefitted as rising energy costs fueled supply concerns. Adding to that, China’s central bank cut lending rates to boost economic growth. It reduced the one-year loan prime rate by 10 basis points from 3.8 to 3.7 percent; the five-year loan prime rate was lowered by five basis points from 4.65 to 4.6 percent — it was the first cut since April 2020.

Also readBudget 2022: India set for modest fiscal consolidation amid slow economic recovery

LME Copper price retested $10,000 per tonne level while aluminium surged to October highs. Nickel stole the limelight as price rallied to 2011 highs amid tighter market and sharp rise in China’s stainless steel prices.

While commodities have benefitted from persisting inflation concerns, rising price pressure has also heightened debate about monetary tightening by the US Fed and other central banks and this has dented risk sentiment, Rao said. The Fed has already indicated willingness to tighten monetary policy aggressively in lieu of strong growth and inflation. The Bank of England has already raised interest rates once and is expected to move again with strong signs of economic growth and higher price pressure. The Bank of Japan this week kept monetary policy unchanged as expected but raised inflation forecasts. The European Central Bank’s monetary policy account showed that it largely supports an accommodative stance but rising inflation has caused a divide.

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The central bank may remain in focus in coming days as market players position for the Fed decision on January 26, Rao pointed out. The Fed is not expected to make any change to monetary policy; however, its comments may give more clarity on how soon the central bank will decide on its first rate hike. Market players are already anticipating a hike in March and this has pushed US 10-year bond yield to two-year high while US dollar index has edged up. Hawkish comments from the Fed may further strengthen the dollar which may not bode well for commodities, he said.

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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