Commodity prices in the last week were mainly influenced by news and development on the global economic front. Even though economic data from the US came on the positive side, what led to risk aversion in the financial markets was the concern over the Greece front. Performance on commodities like Gold, Copper and Crude oil was mixed during the week as uncertain and unresolved economic issues dented optimism over recovery in the US.
Base metals ended on a mixed note in the last week as mixed economic data coupled with concerns over the Greece front limited gains. But positive news related to Greece on Friday helped revive positive sentiments in the financial markets. During the week, the US Dollar strengthened as concerns over Euro zone and its debt woes led to risk aversion. But the currency gave up gains on Friday as Greece asked for a bailout from the European Union (EU) and the International Monetary Fund (IMF).
Gold prices came under pressure in the last week as the dollar strengthened. But demand for gold could resume as a safehaven in uncertain financial markets. Even though economic data from the US and China has been positive, uncertainty in the Euro zone over the debt issue continues. Financial markets still remain susceptible over debt issues in the Euro zone as the EU lifted its estimate for Greece's deficit to 13.6% of gross domestic product. Ireland overtook the southern European nation as the EU member with the largest deficit of 14.3%. Other member nations debt issues in the Euro zone remain a cause of concern and this factor will dominate movement in the Euro.
But gold prices could rise in the coming days on expectation that signs of inflation will revive demand for the metal as a store of value. India the world's largest buyer of gold jewelry faces inflation of almost 15% and consumer prices in the UK too climbed 3.4% in March. Accommodative policy by the US government is also raising risk of inflation and the yellow metal is attracting demand as a safe-haven.
Prices are mainly taking cues from the economic development and the Euro zone debt issue continues to haunt sentiments in the markets. Even though Greece receives a bailout, markets are concerned further over the other Euro zone countries like Spain, Portugal, Italy and Ireland which stand next in line with their debt woes. These worries have led to major pressure on the Euro which slumped sharply in the last week. Weakness in the Euro has revived demand for the low-yielding dollar.
We expect the US dollar to strengthen in this week as evidence of global economic recovery and a surge in the US housing market will boost expectations of a rate hike. Other than that,concerns over debt issues in the Euro zone will continue to provide support to the dollar as a safe-haven during financial uncertainty. In the last week the euro touched the weakest level against the dollar before Greece asked the EU and the IMF to activate a bailout of as much as 45 billion euros.
US Economic Update
Data from the US housing market front has been positive in the last week. New home sales in the US rose 27% in March, the highest gain since April 1963. US durable goods orders gained 2.8%, giving indications of an improving economic scenario in the world's largest economy. Unemployment claims in the US declined 24,000 to 456,000 in the week ended 17th April. This indicates that companies are now enjoying better sales and profits and are thus gaining confidence in the economy and staff retaining.
In the last week, Federal Reserve Chairman gave his speech on the US labour market saying that growth in the labour market could be slow as the number of jobs lost since the recession in December 2007 was high. But a significant amount of time will be required to restore the 8.5 million jobs that were lost during the past two years. A gradual pick up in jobs will also help to list consumer spending. The statement by the Fed Chairman indicates that slow recovery on the labour market front will dent hopes of an immediate interest rate hike by the US. Despite lower expectation of a rise in interest rates, we expect the dollar to strengthen as worries in the Euro zone could boost demand for the low-yielding currency.
Another important development in the US last week was the speech by President Barack Obama. He emphasized on the need for financial regulatory reform and modernization. New reforms may help to bring certainty in the capital and credit markets and fuel the economy by creating jobs.
Fundamental Outlook
Despite positive economic data, markets remain concerned over issues like debt-woes in the Euro zone. Debt issues in Spain, Portugal and Italy remain unresolved and this continues to haunt market sentiments. Hence, this uncertainty in the markets could lead to strength in the dollar which will lead to downside pressure on prices of dollar-denominated commodities. Commodities will take direction from movement in the dollar, economic data and corporate earnings results. On one hand, markets are witnessing positive economic data and corporate earnings results which give hope of economic recovery. But on the other hand, markets remain susceptible over debt issues in the Euro zone.
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