Ravindra Rao, VP- Head of Commodity Research at Kotak Securities
The general trend seen in financial markets in the last few days was exit from riskier assets like equities and commodities to the safety of cash especially the dollar.
We saw a brief break from the trend this week as the dollar index came off highs and recently battered assets like commodities, Japanese yen, and US bond saw some buying interest. Equities remained volatile and Chinese equities managed to test near one-month high.
The change in trading interest shows renewed search for best investment amid increasing uncertainty. Global growth worries are high as central banks look to tighten monetary policy aggressively while inflation remains at elevated levels and China continues to struggle to get virus spread under control and Russia-Ukraine fighting continues to intensify with no major efforts to restart talks.
Commodities attempted to stage some recovery this week gaining support from a correction in the dollar index, improvement in China's virus situation and China's measures to support the economy.
The dollar has been on a steady rise since the start of the year on the back of safe haven buying and US Fed's monetary tightening expectations and has tested the highest level since 2002.
The dollar's sharp rally made it vulnerable to profit taking which materialised amid some disappointing US economic data, correction in bond yields and hawkish comments from some other central banks.
US housing, regional manufacturing indices and labour market data released this week disappointed. The US 10-year bond yield corrected from 2018 high as bonds benefitted from safe haven buying.
Inflation has been rising globally and this has put pressure on central banks to act. European Central Bank's monetary policy account released this week showed increased debate as to how fast and how far they should tighten policy. Meanwhile, Swiss National Bank also attracted market attention as Thomas Jordan said policy makers are ready to act against inflation.
While the US dollar has come off the highs, Fed's monetary tightening stance has kept a floor to the price. Fed officials have repeatedly expressed support for monetary tightening to get inflation under control. Financial markets got a brief jolt this week as Fed chairman Jerome Powell said that they will continue with rate hikes unless there are clear signs of improvement in inflation situation.
One of the biggest concerns for commodities in the last few days was increasing economic stress on the Chinese economy owing to virus related restrictions. Outlook for Chinese economy still remains bleak as economic indicators highlighted the impact of restrictions. China's industrial production, retail sales and unemployment data released earlier this week disappointed.
Market nerves calmed somewhat as the virus situation improved somewhat in China's Shanghai. Shanghai officials declared the city's epidemic under control and aim to reopen broadly and allow normal life to resume from June 1. Market confidence wavered as Shanghai found first cases outside quarantine in six days, raising questions over whether plans to loosen curbs there will be impacted.
Once China starts lifting virus related restrictions, economic activity may improve. However, it is likely that authorities may take a gradual approach to avoid resurgence in cases.
With increasing challenge from virus spread, China has also stepped up efforts to support the economy. Amid the latest move, the People's Bank of China cut the five-year loan prime rate, which is the reference rate for mortgages, from 4.6 to 4.45 percent to boost activity in real estate.
Commodities attempted some recovery this week, but there is still uncertainty if this trend can continue. The dollar is off the highs but may continue to be supported by Fed's hawkish stance. Outlook for China also remains clouded unless the virus situation comes under control. Amid continuing debate about the impact of monetary tightening, the market focus will remain on economic numbers and central bank comments.
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