Covid 19 brought economic changes and made markets go uncertain. For more than a year now, uncertainty pervades in the market in the backdrop of economic havoc that has been unleashed on the economy. During such arduous times, Fed has always kept its stance static on the economic growth. The interest rate has been kept at a record time low to infuse liquidity in the market, in order to revive the economy. But such an excessive accommodative stance, coupled with record breaking stimulus package has led to an increase in inflation in the market. Though Fed has ruled out its threat, calling it transitionary, burgeoning commodity prices tell a different story.
As market players are trying hard to decipher Fed’s monetary policy stance, commodities have effectively witnessed a directionless week. Given the burgeoning inflation in the economy, coupled with directionless trade that is taking place due to the resurgence of the health crisis in the Chinese economy, investors’ confidence is at an all-time low level. due to the present circumstances, Fed’s monetary policy can be altered. This has led to uncertainty pervading the market, leading to a directionless week.
Due to the escalating situation, COMEX gold had plummeted to an all-time low in the month of March, but earlier this week it bounced robustly back up. On the other hand, the most flickering and highly active indicator for the US economy, Crude oil, has bounced back after taking the significant support of near $65 a barrel. However, it is to be noted that the gains lost their momentum just below the cost of the barrel trying to reach $70 a barrel. The volatility being witnessed in the market has been seen due to Copper’s mixed trade. The volatility in the larger market also comes amid labor concerns in Chile.
But is it the first time that the commodity market is witnessing such volatility? No. On the other hand, this week, commodities started on a negative note. This was due to the apprehensions that had arisen in the market due to upbeat US non-farm payrolls data that was released. This had led to some hawkish comments that had fueled market unfriendly expectations that Fed might start tightening the monetary policy soon.
Such hawkish comments were market unfriendly, as they meant no more easy credit and liquidity in the economy. It is to be noted that easy credit leads to robust investments and demands in the economy and is usually the most sought-after reform to bring back the economy on track after extreme cyclical fluctuations.
But such unfriendly sentiments withered away after consumer price data was released which came largely in line with expectations. This emphatically and effectively weakened the monetary tightening debate. But since the market depends on speculative banter quite a lot, commodities again lost traction as, this time, producer price data showed a much larger-than-expected rise in prices in the economy. This reflected a rise in price pressures in the economy.
It is to be noted that the Fed has effectively begun to tackle the burgeoning inflation in the economy. Thus, the debate over monetary policy tightening has taken the center stage but, it is to be noted that the Fed has failed to give a clear-cut timeline as to when can such monetary policy tampering take place. The Fed will effectively start tapering bond purchases in the market.
It is to be noted that the economic indicators are causing uncertainty and havoc in the market as the Fed’s lack of clarity on its monetary policy has caused market players to look at monthly economic numbers to decipher the current scenario prevailing in the market. People have taken to deciphering the central bank’s comments on the matter as mixed economic data coupled with mixed Fed comments has led uncertainty to pervade the market.
Other indicators other than commodities and the stock market have been diverging trends in various asset classes. As aforementioned, commodities have lost their upward momentum due to high speculations about tightening monetary concerns. This has effectively led to the rise in US dollar and bond yields. Additionally, US equities have set record-high levels.
The China factor
While the market may be looking for signs of the Fed’s monetary policy, it is to be noted that diplomatic relations with China have also led market players to closely watch Chinese developments for some apparent signs. According to reports, the Chinese equities have recovered from recent lows. This has come amid robust stimulus measures expectations to boost growth. But needless to say, market players remain nervous about an economic slowdown. The apprehensions about economic slowdown are coupled with rising virus cases and stringent, regulatory crackdown measures.
In fact, as a detestable attribute of the virulent nature of the virus, resurgences in various parts of the countries can be witnessed. Reportedly, global virus cases are continuing to rise, China recently has been recording record growth of infections in Wuhan, which doesn’t spark much confidence in investors and consumers.
According to reports, China’s covid count has surpassed 205 million. Though, market reaction has till now been subdued and subtle at the back of expectations that authorities might effectively try to avoid stringent measures to emphatically limit the economic damage. However, it is no news that if the situation continues to deteriorate, authorities may be forced to impose tighter monetary measures, that might not be well suited for the market. But certain agencies, like International Energy Agency, have lowered their growth expectations at the back of the resurgence of the virus.
Thus, in totality, amid gross uncertainty, that is currently plaguing the market, many market players might keep their hawk-eye on the US economic numbers and the central bank’s comments. Further, many market players lie in wait for cues that are to come in the future from Federal Open Market Committee (FOMC), which will release FOMC minutes and Fed Chairman Jerome Powell’s comments next week. Thus, for now, economic numbers, China’s industrial production, and retail sales data will effectively drive the economy.