Global commodities have fallen to two-month lows as traders are worried that an earlier-than-planned cut in bond purchases by the Federal Reserve, and weak demand because of a rise in COVID cases, could prolong the downtrend.

The haven for investors right now is US Dollar. The dollar index (DXY) has held near over a nine-month high of 93.5 it hit Thursday. Analysts believe DXY breaking above 93-level is just a start, and the greenback can gain more strength in the coming days.

A strong dollar is bad news for commodities in two ways: one, money managers and traders shift a part of their holdings from commodities to the dollar, and two, it hurts demand as the cost of imports rise.

“In the short run, in the last few days, you have seen a very sharp upmove in DXY, which has crossed a certain level of 93.5. This confirms a double-bottom and this points towards the dollar getting stronger. I feel this dollar strength seen yesterday was just a breakout of that level; it would likely gain a little more strength in the coming days. And this I think would lead to a bit of a cooling off in commodities and equities,” Atul Suri, the CEO of Marathon Trends, told CNBC-TV18.

A rise in DXY reduces the appeal of commodities to foreign investors, which happened in the global markets after the FOMC meeting minutes.

“When the dollar gets stronger, the more global macro mode moves into a bit of a risky trade. So you will find commodities and equities tend to correct,” Suri added.

Equity markets in the US, Europe and Asia have been under pressure over the last couple of sessions.

Crude oil is headed for its longest stretch of decline since 2019. While Fed has a role to play here, investors are also worried about the global energy demand.

The surging oil prices received a reality check when the narrative of further tightening supplies hit investors. As countries put economies under lockdown, investors fear the demand for crude oil will drop again. The spread of the Delta variant of coronavirus is one factor.
Economies across Asia are restricting mobility to contain the outbreak, be it China, Australia, or New Zealand.

Mark Matthews of Bank Julius Baer & Co, however is positive on oil, albeit for the next few months.

Oil demand has largely recovered, a report by Julius Baer said, and the market looks mature. It said the pressure on oil prices would likely swell longer term.

“The recovery- and reopening-driven demand bounce ebbs, while supplies from shale nad petro-nations expand. While the pandemic is in focus, we see the risks rather coming from supply dynamics, the petro-nations, and geopolitics,” the report said.

For other commodities, though, Matthews said, “We generally feel the signals are showing we are at a peak, and they should go down.”
Prakash Diwan, another market expert and Andrew Holland of Avendus Capital, seconds his views.

Holland believes the commodity market will undergo a 5-10 percent global correction. “Commodity is a place where we have seen some weakness over the last few weeks, despite the kind of roll-up you have seen in the share prices, in terms of the commodity prices themselves,” he said.

He said, analysts in India will start reducing their forecasts if the prices remained where they are.

A buying opportunity?

Copper, an indicator of overall economic health, sank to its lowest levels since April on Thursday. It is down over 7 percent this week. Iron Ore retreated 12 percent in Singapore Thursday.

Diwan thinks it is an opportunity for long-term investors, particularly institutional investors, to put in money. The froth is getting settled, and that is because retail investors are going back to work, he said.

“Given the global commodity setup, there could be some cool-off in terms of the underlying commodity prices. We have seen that in copper in iron ore, but does that change the long-term potential that Tata Steel has? The answer is no.”

“You have Steel Authority of India Ltd (SAIL), which is available cheaper. You have Tata Steel with scalability, deleveraging, profits coming back, India business throwing up so much cash,” he said.

“I know a lot of clients who have eased out of the market, booked profits and probably are not going to allocate so much money they did in the last six months. So it plays out very well in that sense,” he added.

The likes of Tata Steel, some of the other names like IndiGo or United Spirits are bound to do well, but you will have these corrections, and I am sure it will get bought into, he said.
Source: CNBCTV-18