Commodities market to remain tizzy until diplomatic efforts resolve Ukraine-Russia stand-off

Commodities witnessed another volatile week as market players assessed the geopolitical situation as well as the central bank monetary policy stance.

Crude oil witnessed huge volatility as price surged to fresh 2014 highs but shed all the gains to trade lower. It was a mixed bag for industrial metals as aluminium and nickel held near-recent multi-year high, while copper swung between gains and losses. Gold also witnessed mixed movement but largely traded on a positive note and touched an eight-month high.

Gold breached the key $1,900 per troy ounce level for the first time since June 2021 as market players sought safe haven amid increased volatility in equity markets and geopolitical risks. The metal remained under pressure for most part of 2021 as market players chose equities and growth-linked commodities over the metal. With increasing volatility in equity markets, market players may be shifting to other asset classes.

Equity markets are under pressure amid increased geopolitical tensions relating to the Russia-Ukraine standoff. Adding to it is increased expectations that the US Federal Reserve may raise interest rates aggressively to get inflation under control. The US Dow Jones index has already slipped to a three-week low.

On the geopolitical front, the market focus is on the Ukraine crisis. Market players are concerned that Russia’s attack on Ukraine may result in a wider conflict. The commodity market is more sensitive as Russia is a major producer of commodities like crude, natural gas, aluminium, nickel and platinum.

Russia has been amassing troops along the Ukraine border and thus fuelled worries of an invasion. Market concerns rose further as the US and western nations warned of an imminent attack with some media reports stating that Russia may attack on February 16.

Market concerns eased somewhat as Russian media said that some of the troops are returning from the Ukraine border after completing their drills. Market concerns resurfaced as the US said Russian claims were false and it continues to build troops in the region.

Adding to it, Russian-backed rebels and Ukrainian forces traded accusations that each had fired across the ceasefire line in eastern Ukraine, while US President Joe Biden said there was every indication that Russia planned to invade Ukraine in the next few days and was preparing a pretext to justify it. Unless Ukraine and western nations are convinced about Russia’s intention or until there are serious diplomatic efforts to resolve the issue, market nervousness may persist and we may see sharp reactions to every development.

Central banks are also in focus. FOMC minutes released this week showed that the central bank officials expect to raise interest rates soon but may take a meeting-by-meeting approach and assess economic data before making the next move. Some Fed officials also warned against aggressive rate hikes. However, some other Fed officials reiterated the need to tighten monetary policy to control inflation.

The Fed will raise interest rates as soon as the March meeting has been factored in and what market players are trying to assess if the pace of rate hikes going forward. Unless there is clear guidance from the Fed, market players may continue to look at economic numbers and central bank comments.

Money Control

Tags: conflict, Gold, Ukraine, Russia, price, commodities, volatility