Commodity markets to keep a close eye on China for additional support measures

Looking ahead, the commodity market focus will turn to flash PMI figures for early insights into business activity.

By Ravindra V Rao, CMT, VP-Head Commodity Research at Kotak Securities

In a significant turn of events, the markets experienced a surge in positive momentum after the Federal Reserve delivered its strongest indications yet of a forthcoming pivot to easing monetary policy in the coming year.

While the maintenance of the status quo was widely anticipated in the December meeting, the Summary of Economic Projections brought a pleasant surprise for investors. For the first time since March 2021, Federal Open Market Committee (FOMC) officials projected no further interest-rate hikes. Notably, the fed funds rate was forecasted to be at 4.6 percent by the end of the next year, signaling a potential 75 basis points rate cut—well below previous projections of 5.1 percent. Markets were expecting a hawkish tone from Powell, along with a pushback against early rate cuts, which was absent. The dovish shift, coupled with Fed Chair Powell’s acknowledgment of progress in easing inflation, has heightened expectations of a near-certain rate cut in March.

The market response to this news has been overwhelmingly optimistic, with investors already pricing in 150 basis points of rate cuts for 2024. Consequently, the US Dollar slid to 101.77, and US 10-year treasury yields dipped below 4 percent for the first time since August. Meanwhile, the Dow Jones achieved a record high, closing above 37,000 for the first time, and the S&P 500 approached all-time highs. Additionally, the European Central Bank (ECB) and Bank of England (BOE) followed suit by maintaining their rates in their final policy decisions of the year.

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Amidst these market dynamics, COMEX Gold surged to $2062.9 per troy ounce and Silver traded as high as $24.59 per troy ounce, benefiting from rising bets on a reduction in borrowing costs in March that weighed on treasury yields. The yellow metal started the week on a negative note, after a resilient US Labour market data released during the previous week prompted investors to pushback against early rate cuts. However, things changed after the US CPI and FOMC meeting.

On the price action front both gold and silver seem to have taken support near important levels of $2,000 and $23 respectively. We expect some consolidation in prices before it moves further higher.

Crude oil and base metals also experienced positive trends, with Crude oil gaining support from an improved global demand outlook after IEA and OPEC report and significant US inventory drawdown. Base metals received a boost from the relaxation of home purchase restrictions in Beijing. On the technical front a bullish Engulf candlestick formation is in play in MCX Copper which might push the price as higher as Rs 745 per kg.

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Looking ahead, the market focus will turn to flash PMI figures for early insights into business activity. Key economic indicators, including US GDP and Core PCE figures, will be closely monitored in the following week. The potential for a soft-landing, increases if growth moderates and inflation continues to ease.

Additionally, the Bank of Japan’s monetary policy decision will be eagerly awaited, as speculation regarding its exit from a negative interest rate policy gained momentum following comments from BOJ Governor Kazuo Ueda and one of his deputies last week.

Furthermore, markets will keep a close eye on China for additional support measures, especially after the People’s Bank of China injected a record amount of cash via one-year policy loans.

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