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Movement in gold prices to depend on Fed rate hike news

Markets across the globe traded on a mixed note in the last fortnight. Important economic datasets from the US were weak, which has fueled speculation with respect to rate hike timing.

Naveen Mathur        Last Updated: September 19, 2016  | 19:04 IST

Naveen Mathur
Markets across the globe traded on a mixed note in the last fortnight. Important economic datasets from the US were weak, which has fueled speculation with respect to rate hike timing. Nonfarm payrolls employment data for the month of August plunged to 151,000 from previous month's 275,000. Even average earnings and unemployment data came on a bitter note which has fueled speculation about the economy with respect to US labour market strength.

Moreover, recent dovish comments by Boston Fed President Eric Rosengren and Fed Governor Lael Brainard have reduced expectations of a rate hike in September's monetary policy review. Both the policymakers have hinted towards a rate hike possibility by the end of 2016, preferably December 2016. CME FedWatch Tool has also indicated a 24 per cent chance for a September move and a 55 per cent likelihood of a December 20116 hike.

In the ECB Monetary Policy Meeting dated September 9th, 2016 the interest rates were kept unchanged at "0 percent". Moreover, the ECB president said that the rates will remain at present or lower levels for an extended period of time and has urged member countries to boost growth through spending.

Bank of England (BoE) also voted unanimously to maintain the interest rates at 0.25 per cent which was a widely anticipated move, causing no drastic volatility in the market. The BoE monetary policy committee expects Britain's economy to grow in the second half of 2016, all thanks to the recent release of robust economic datasets from the nation. They have also hinted at the possibility of having another rate cut by the end of 2016.

The rupee depreciated 0.47 per cent in the last fortnight owing to on-off speculations of rupee devaluation, despite the finance ministry's denial about any such move. In the past, RBI has consistently rejected the demands of devaluation and believes that market forces should decide currency level and it would intervene only to prevent sharp movements in the currency. Weakness in the Asian market equities also governed the trend of the Indian markets and rupee.

Gold prices in the international markets declined 1.1 per cent, while MCX gold prices declined 0.35 per cent in the past fortnight.

However, host of economic data released from the US indicated slow growth in the US economy. Weak US jobs data led investors to bet that a September rate rise was no longer on the cards, weakening the dollar. The US services sector activity slowed to a Six-and-a-half-year low in August amid sharp drops in production and orders, pointing to slower economic growth that further diminished prospects for a near-term interest rate increase. Markets are pricing in just a 15 per cent chance that the Fed will hike interest rates during its September 20-21 meeting, according to CME FedWatch. Many now expect a rise in December after the US presidential election.

LME Copper prices rose 3.5 percent in the last fortnight and MCX copper prices surged 4.3 percent in the last fifteen days as string of weak economic data from the US further raised chances of no rate hike in September. Further, Chinese industrial production and retail sales data for August came in better-than-expected indicating government spending and strong property sales are supporting the economy.

Investment in buildings and other fixed assets outside rural households climbed a better-than-expected 8.1 per cent year-over-year in the first eight months of 2016, while retail sales grew 10.6 per cent in August from a year ago. Also, the Bank of England lifted its forecast for the UK GDP after signs that the economy did not slow as much as feared after the Brexit vote and left interest rates on hold at 0.25 per cent.

However, sharp upside was capped as stocks at the LME's Asian warehouses have persistently risen since mid August, indicating that China is exporting the surplus. Besides, investor sentiment looks stressed as hedge funds dramatically raised bearish bets on copper in June pushing the overall market into the deepest net short position since at least 2006, when government first started to collect the derivatives trading data.

WTI and MCX oil prices declined by 3.17 per cent and 3.03 per cent in the past fortnight. Oil prices were pressurised by data showing large weekly builds in the US petroleum products, and forecasts by the international energy watchdog and OPEC that signaled the global crude glut could persist into 2017. However, prices drew support earlier when Chinese trade data showed crude imports in August surged nearly 25 per cent from a year ago to the second-highest ever, as independent refiners took advantage of low oil prices before import quotas expire in December.

Outlook
Gold price trajectory from here on is dependent on the uncertainty over the rate hike in the US. The Federal Reserve meeting scheduled on September 20-21 will be a close watch by investors across the globe.

The meeting of oil producers in Algeria scheduled on September 26-28th will be closely watched by oil investors across the globe. There are already talks of stability in price by the OPEC members which will be a supportive factor for oil prices.

We expect base metal prices to trade lower as chances of a rate hike in December stands at a high 55 per cent although probability for September is bleak at a mere 15 per cent. Also, investors will cautiously watch OPEC meeting on the sidelines of IEA summit on September 26th - 28th.


The progress of rain in the month of September is below average as per IMD data. During the second week of September, the rainfall was below Long Period Average (LPA) by 29 per cent over the country, which was 16 per cent lower in the previous week.  However, the overall spread of monsoon rain is satisfactory as Pulses, Paddy, oilseeds and coarse cereals have all seen a rise in sowing area compared to last year. According to ministry of agriculture data released last week, total acreage in the country is at 1,060 lakh hectares (lh), higher by 3.6 per cent compared to last year.

During the last fortnight, the prices of guar complex cardamom, sugar and cotton surged while oilseeds, coriander and jeera prices have traded lower.

During last fortnight, Guar complex closed higher due to lower sowing acreage and pickup in physical demand. The acreage in Rajasthan, the biggest guar producing state, is continuing to lag behind compared to last year acreage. The acreage in Rajasthan according to government data is 29.8 lakh hectares less by about 24 per cent compared to last year.  The acreage in Haryana and Gujarat is also lower this season.

Cardamom traded on Multi Commodity Exchange (MCX) to close higher by 7.8 per cent during last fortnight to close at Rs 1,203 per kg. Increase in prices is due to reports of a sharp fall in output of the crop during the current season coupled with lower inventories in the upcountry markets, resulting in fresh buying by the stockists and traders to meet the Diwali demand. Similarly, the prices of sugar and cotton too increased during the last fortnight on reports of lower production reports due to lesser acreage in the current kharif season.

Among edible oils, prices of crude palm oil closed 1.4 per cent higher while refined Soy oil was down 0.8 per cent. Palm oil 1 prices increase by taking clues from International edible oil market and increase in export duty by Malaysia. Palm oil imports by India fell for a fourth month in August as some buyers switched to soybean oil. Good stocks of refined soy oil pressurised prices in the domestic market. As per SEA data, high stock at ports and in the supply chain, pegged at over 2.15 mt as on August 1, has slowed the pace of edible oil imports into India.


Soft commodities like cotton and sugar prices closed higher during last fortnight. Cotton prices on MCX increased by 3.1 per cent, while NCDEX sugar closed higher by 4.2 per cent. Increasing international prices due to forecast of widening supply deficit may support domestic prices. Moreover, news of 35 per cent loss in Maharashtra sugarcane and lower planting this season also supports prices at higher levels. Cotton prices were on uptrend due to lower supplies and expectation of lower cotton production in the country. As on September 16th, cotton is planted in 102 lh in the country, down by 11.3 per cent against 115.2 lh last year.

Among oilseeds, mustard and soybean seed prices closed lower on reports of above normal monsoon and anticipation of good harvest for oilseeds next season. The soybean is under pressure due to lower demand for crush as export demand for meal is lower this year. Similarly, mustard prices are moving in sideways to lower range, as winter demand has not picked up.

Outlook

For the next fortnight, we expect oilseeds and edible oil to trade in higher due to pick up in domestic demand. Similarly, Soft-commodities like sugar and cotton may trade higher due to expectation of lower production in kharif season. Guar complex may trade higher on reports of lower acreage and steady demand. The prices of turmeric and jeera may trade sideways to higher on expectation of pickup in export demand while cardamom may trade sideways to lower due to good physical supplies from new season crops in coming weeks.


The author is Associate Director, Commodities & Currencies Business, Equity Research & Advisory at Angel Broking

Disclaimer: The opinion expressed is for reference only.

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