Volatility may persist in commodities due to a lot of uncertainty about the direction of central bank monetary policy
Financial markets have become increasingly volatile as market participants attempt to assess the monetary policy stance of major central banks as well as China’s efforts to curb the rise in commodity prices as well as the divergent viral situation in Asia, USA and Europe.
The improving economic outlook and signs of increasing price pressure have heightened market fears that central banks may tighten monetary policy. Additionally, some Fed officials have said they are ready to consider discussing reducing asset purchases in the coming months.
Market concerns persisted despite mixed economic data and accommodating comments from major central banks. Weekly jobless claims in the United States fell further to the lows of March 2020, reflecting improving labor market conditions, while an unexpected drop in pending home sales added to the disappointing housing data.
Adding to the volatility, China has repeatedly expressed concerns about rising commodity prices and its willingness to cut prices. A Reuters report noted that China will tighten price controls on iron ore, copper, corn and other important commodities in its 14th five-year plan from 2021 to 2025 to deal with abnormal price swings. China has also asked five state-owned companies to report on their use of imported oil in recent years, as part of a larger effort to regulate crude imports into the world’s largest oil importer ( Reuters reports).
Market players have also become cautious of divergent viral situations in Asia, Europe and the United States. While the United States and Europe have seen a significant improvement in the viral situation allowing authorities to ease restrictions related to the virus, Asian countries are still grappling with higher cases and have further tightened restrictions.
Uncertainty affected the equity and commodity markets. The US DJIA Index has recovered from its recent lows, but is well below the all-time high set earlier this month. Copper is also struggling near the 10,000 level, but remains well below record highs. Brent crude oil continues to trade in a wide range, but below the key level of $ 70 per barrel.
There are also few winners. Gold broke through the $ 1,900 per troy ounce level for the first time since January, on support from choppy stocks, a weak US dollar and ETF buying. China’s Shanghai Composite Index hit its highest level in February, as market players chose alternative assets amid a crackdown on the commodities market. US bonds also posted modest gains on the purchase of safe-haven securities.
There is a lot of uncertainty surrounding the central bank’s monetary policy and commodity crackdown in China and it may not be resolved soon, meaning volatility may persist in the near term.
Source: Financial Express