Commodities Week Ahead: Oil, Gold on Edge as Biden, Rivals Spar Over Debt Deal

• US debt crisis rolls on as Biden, McCarthy hold to their positions
• Gold, oil soft in Monday’s Asian trade on wavering headlines for a likely debt deal
• Fed remarks parsed as well for potential June rate hike signal

The US debt crisis rears its head again this week as President Joe Biden and his rivals continue negotiations on raising the $31.4 trillion federal debt ceiling, keeping oil and other risk assets on edge as Wall Street awaits a deal that can avoid a default on the nation’s payments.

Gold led safe-havens to a lower open for Monday as Biden, returning from the G7 leaders summit in Hiroshima, Japan, urged House Speaker Kevin McCarthy on a phone call to ask rival Republicans in Congress to moderate their “extreme positions” in demanding expenditure cuts for a new debt deal.

Biden said,

“It’s time for Republicans to accept that there is no bipartisan deal to be made solely on their partisan terms. They have to move as well.”

A source familiar with the negotiations said Republicans had proposed an increase in defense spending while cutting overall spending. Congressional Republicans voted to raise the debt ceiling three times, with no budget cut pre-conditions, when former President Donald Trump was in the White House.

The Congressional Budget Office has warned that the United States faces a "significant risk" of defaulting on its debt within the first two weeks of June if lawmakers fail to increase the debt the country is legally allowed. The International Monetary Fund has warned that a default would have “very serious repercussions” for the US and global economies, including likely higher interest rates.

As headlines on the debt crisis wavered between the likelihood of a “deal” and “no-deal,” gold for June delivery on New York’s Comex weakened to $1,977.55 per ounce by 01:15 ET (05:15 GMT) after officially settling Friday’s session up $21.80, or 1.1%, at $1,981.60.

The benchmark gold futures contract finished all of last week down 2% after tumbling to $1,954.40 on Thursday’s session, versus a May 4 record high of $2,085.40.

For this week, gold bulls need to meet the 5-week EMA, or Exponential Moving Average, dynamically positioned at $1,990 and move further up the resistance zone towards the Daily Middle Bollinger Band of $2,005, said Sunil Kumar Dixit, chief technical strategist at SKCharting.com.

Limiting some of gold’s loss was the extended weakness in the US dollar, which made dollar-denominated commodities like crude more affordable to holders of other currencies.

Crude prices skidded as McCarthy rebuked the president in an appearance on Fox Business, accusing him of moving the goalposts by seeking to tie spending cuts to increased tax revenues. McCarthy said,

“It seems as though he wants default more than he wants a deal. That’s not where I’m at,” 

Crude prices lost almost 1%, with New York-traded West Texas Intermediate, or WTI, hovering at $71 and London-traded Brent at just under $75 after gaining about 2% last week. The two oil benchmarks had accumulated double-digit losses over four previous weeks.

WTI needs to hold above mid $71 this week and sprint past $73 if oil bulls are to recapture its recent upside, Dixit of SKCharting said.

Stephen Innes of SPI Asset Management said that major commodities were trading in a tight range.

"Predicting where that midpoint will finish at the end of the day, let alone the end of the week, is getting increasingly more challenging given the mixed global macro and swinging emotions. Hence long positioning remains very low among our managed money crowd.”

Remarks by Federal Reserve policymakers will be parsed for insights on the future path of interest rates. With investors worried that the Fed’s aggressive rate hikes could tip the economy into recession, appearances by several central bank officials in the coming days will be closely watched.

Fed officials scheduled to make appearances during the week include Federal Reserve Bank of St. Louis President and Federal Open Market Committee (FOMC) voting member James Bullard, CEO of the Federal Reserve Bank of Dallas Lorie Logan, Richmond Fed President Thomas Barkin and Federal Reserve Bank of Atlanta President Raphael Bostic. U.S. Treasury Secretary Janet L. Yellen will speak too.

Bowman said last Friday that the Fed will probably need to raise rates again if inflation stays high. The US is also to release data on the US GDP (revised) and PCE Prices. Fed minutes are due Wednesday.

China, meanwhile, is to release Industrial Profit data on Friday.

Economic data out of China indicated that the world’s second-largest economy is struggling to gain momentum amid an uneven recovery after pandemic restrictions were lifted, adding to doubts over how much it can contribute to growth in the global economy this year.

The weaker Chinese data has particularly weighed on oil markets, which have been counting heavily on the world’s largest crude importer to jump-start an early price run-up to the typically heavy summer demand period for energy.

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Disclaimer: The content of this article is purely to educate and inform and does not in any way represent an inducement or recommendation to buy or sell any commodity or its related securities. The author Barani Krishnan does not hold a position in the commodities and securities he writes about. He typically 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.