Commodities Week Ahead: Fed Speak, China COVID Policy Tough to Navigate

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Just when the risk takers in , and thought they had the Federal Reserve’s strategy down pat, the central bank’s governor Christopher Waller has thrown another curveball at markets. The Fed “still got a ways to go” on its inflation fight, Waller told a banking conference in Sydney, helping the rally anew after its plunge since Thursday on softer US consumer price data.

With the greenback’s turnaround, last week’s lightning rally in commodities—which gave bullion its best week in 30 months while helping cut crude’s losses to no more than the previous week’s gain—paused as well.

Investors, of course, know the Fed still has some way to go before it can get October’s annualized 7.7% growth in the down to its target of 2% per annum.

Also reducing is different from pausing or cutting rates altogether.

The Fed is still in a tightening mode—make no mistake about that. Nevertheless, the central bank is quite likely to soften its aggressive that has added 375 basis points (bp) to rates since March, with the last four of those increases being jumbo-sized 75 bp each.

The bet until Friday had been for a tweak in the Fed’s upcoming rate decision in December—not a pause or reversal. Waller probably meant that as well in his remarks.

But Fed communication is never perfect. Markets tend to overread what officials at the central bank say, resulting often in flawed bias. Just like the too many cooks who can mess up a broth, a profusion of Fed speakers (sometimes as many as five in a day) can make the central bank’s messaging more convoluted than intended.

COMEX’s benchmark for delivery in December were at $1,763.70 an ounce by 01:40 ET (06:40 GMT), down $6 or 0.3% on the day.

Last week, December gold rose a total of $92.80, or 5.5%—its most in a week since a 6.5% jump during the week to Apr. 3, 2020.

Wrangling with the nuances in Fed messaging wasn’t the only challenge for traders.

China’s ever-shifting stance on COVID lockdowns was just as difficult to navigate.

Oil prices rallied on Friday after China’s National Health Commission adjusted its COVID prevention and control measures. But COVID cases climbed in China over the weekend.

Leon Li, a Shanghai-based analyst at CMC Markets, however, said the oil market had been “too optimistic” over China’s reported reopening from lockdowns, adding:

“The virus will spread faster in winter and the rapid growth of cases makes it impossible for the Chinese government to adjust the zero-COVID policy.”

“Moreover, it will take some time from the release of the policy to its implementation, so China’s full liberalization may have to wait until the first quarter of next year, which means that the rebound of oil prices last Friday is unsustainable.”

China, the world’s largest oil importer, on Friday shortened quarantine times for close contacts of COVID cases and reduced by two days the stay-in period for inbound travelers. It also eliminated a penalty on airlines for bringing in infected passengers.

China’s demand for oil from world’s top exporter, Saudi Arabia, also remained weak as several refiners have asked to lift less crude in December.

“The latest easing in quarantine requirements is certainly a step in the right direction, but the market will likely need to see further easing if this recent enthusiasm is to be sustained,” ING said in a note.

On the oil front, US crude’s benchmark (WTI), was down 43 cents, or 0.5%, at $88.53 a barrel for its December contract.

London-traded Brent, the global crude benchmark, was off 38 cents, or 0.4%, at $95.61 for delivery in January.

A firmer dollar pressured oil as well, as trading began for a new week.

The Dollar Index, which pits the greenback against the , , , , and , was up 0.4% Monday, climbing for only the third time in 10 sessions. Last week, the greenback-driven index tumbled 4.1%, its most since a weekly drop of 4.8% in March 2020.

Separately, US Treasury Secretary Janet Yellen said on Friday that India can continue buying as much Russian oil as it wants, including at prices above a G7-imposed price cap mechanism, if it steers clear of Western insurance, finance and maritime services bound by the cap.

For this week, investors will be on the lookout for a spate of US data, including Wednesday’s , that will provide more insight into whether the Fed’s aggressive rate hikes were cooling the economy.

The US is also to release October data on , , and . The housing data is likely to show the ongoing impact of the rapid rise in interest rates so far this year.

The UK government is finally to announce its new budget plan and investors will be paying close attention after the market meltdown set off by September’s ‘mini-budget’. Fallout from the collapse of cryptocurrency exchange FTX will continue to reverberate through the crypto market.

Disclaimer: Barani Krishnan uses a range of views outside his own to bring diversity to his analysis of any market. For neutrality, he sometimes presents contrarian views and market variables. He does not hold positions in the commodities and securities he writes about.

Source: Investing.com Canada

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