Commodity markets will take cue from dollar, equities, US non-farm payrolls data this week

Commodities have been volatile as market players try to assess China’s economic health as well as the Federal Reserve’s latest monetary policy.

Fear of an energy crisis in Europe and power shortages in China weighed heavy in the week gone by. Commodities were volatile as market players assessed the demand-supply impact.

Natural gas and coal prices have risen sharply in Europe and Asia in the last few months amid robust demand and tighter supply.

Lower inventories ahead of the high-demand winter season are adding to the worries. China has been struggling with power issues and has begun rationing energy use.

A sharp rise in fuel prices rattled the global energy market. NYMEX natural gas breached $6 per mmBtu level for the first time since 2014, while UK gas futures jumped to an all-time high.

Brent crude breached $80 a barrel level in the previous week for the first time since October 2018, as tightness in coal and natural gas forced market players to look at alternatives.

Industrial metals were volatile, too. Power shortages can hamper production activity, tightening supply. On the other hand, rising energy costs can have an adverse impact on manufacturing activity, dampening demand. Global manufacturing activity has been hit by rising raw material prices and supply-chain issues. Rising energy costs may add to the pressure. Rising fuel has aggravated concerns about rising inflation impacting demand.

Most industrial metals came under pressure as power woes added to concerns about the health of the Chinese economy. China’s official manufacturing PMI data, industrial profits readings and home price data are pointing to a slowdown in economic activity.

Gold also witnessed sharp volatility as market players countered strength in the dollar and rise in bond yields against rising inflationary pressure and increasing uncertainty about China.

The dollar index jumped to a year’s high as bond yields surged to June highs amid increased expectations that the Fed may start monetary tightening.

The dollar, however, lost momentum amid mixed US economic data and as some Fed officials played down inflation risks.

With Chinese markets closed for a week-long National Day holiday from October 1 to October 7, commodities may largely reflect the movement in the US dollar and equities.

The key event this week is the US non-farm payrolls data, which will reveal the health of the labour market and also offer clarity on the Fed’s monetary policy stance.

The US central bank has indicated it may start bond tapering, however, the decision will depend on the country’s economic health. Jobless claims have risen for the last three weeks, reflecting challenges in the labour market. If the US non-farm payrolls report also disappoints, it may ease expectations that the Fed may act soon.
Source: Money Control