By Barani Krishnan
Investing.com -- The ‘Crazy Commodity’ world paused somewhat this week with neither of the two biggest macro assets in the resource universe - oil and gold - going parabolic.
That said, nickel still redefined market lunacy with a mind-blowing intra-week gain of 96%, before settling up 66% to add to last week’s 19% rise. The metal used in stainless steel and battery-making is up 200% or $32,000 a tonne from a year ago.
Some commodities, including wheat and London-traded gasoil, gave back a chunk of recent gains after traders realized there were limits to how much valuations, or consumers’ wallets, could be stretched over fundamentals grossly distorted by the Russia-Ukraine war.
With Vladimir Putin into his third week to prove the West wrong - and Joe Biden and his allies equally determined to squeeze Russia financially dry before that - there seems no quick end in sight to the forthcoming volatility in energy and food prices as speculators test consumers’ patience to breaking limits.
The coming week isn’t going to be any easier. After months of speculation over whether they’ll do it in March, the Federal Reserve is 99.99% certain of doing the first pandemic-era rate hike when its policy-making Federal Open Market Committee convenes this week.
What remains uncertain is whether Fed Chair Jerome Powell will stick to his “nimble” approach of 25-basis points first or be forced to do more (essentially 50 bp) by hawks that include St. Louis Fed chief James Bullard, and Christopher Waller, one of the central bank’s seven governors. To be sure, the Fed Rate Monitor Tool published by Investing.com shows a 94.9% probability of a 25-50 bp increase in the coming week.
Bloomberg used an interesting airplane landing analogy in its commentary this week to explain the economic landing attempted by Powell.
As in the “Miracle on the Hudson”, where Captain Chesley “Sully” Sullenberger safely piloted his crippled U.S. Airways plane to an emergency landing in the frigid waters of Manhattan’s Hudson River in 2009, saving all 155 on board, Powell is attempting his own miracle landing for America’s 330 million people.
The difference for the Fed chair is that this might be a trickier touchdown. His test will be to curb inflation running at 40-year highs by raising interest rates just enough to cool demand - and not to kill it or send the economy into a recession.
It’s not that the Fed hasn’t done it before. A quarter-century ago, Alan Greenspan - arguably the central bank’s most iconic star ever - pulled off such a soft landing in 1994-95 with a combination of stiff and moderate rate hikes to crush inflationary pressures, although the bond market crashed and Wall Street tanked.
The problem for Powell though, as Bloomberg notes, is that the feat has become markedly more difficult now with the Russian invasion of Ukraine having unleashed turbulence in global financial and energy markets that will be hard to suppress, regardless of the tools in the Fed’s kit - whose remarkable powers the Chair never fails to remind us of at each monthly news conference.
“It’s going to be very tricky,” Moody’s Analytics Chief Economist Mark Zandi was quoted saying, pointing to rising energy bills - along with slumping stock and credit markets - that could also sap consumer demand, increasing the chances of a recession.
“The economic plane is coming into the tarmac at a very high rate of speed, buffeted by severe crosswinds from the pandemic, with a lot of fog created by uncertainty due to geopolitical events,” Zandi said.
“A 25 basis points rate hike at the March meeting would be a no decision as opposed to a decision … and it’s not going pull the handbrake on the inflation momentum that arguably is being further fueled [by the Russia-Ukraine conflict]," Johan Grahn, head of ETF Strategy at Allianz, told Investing.com.
Initially winning praise for the Fed’s quick stimulus action that helped prevent the Covid‑19 recession from turning into an outright depression, Powell is now the poster-boy for everything gone wrong with inflation - especially after his admission that the central bank had totally misread the problem as being transitory.
On top of a maximum of seven rate hikes this year - as per the number of Fed meetings - there is a yet-to-be-specified reduction in the Fed’s balance sheet, which now stands at $8.9 trillion after the central bank loaded up on Treasuries and mortgage-backed securities to support the economy since the Covid outbreak in March 2020.
That action will reduce the cash in the financial system - but it will also bring uncertain consequences for bond and stock markets. The danger is that if inflation doesn’t begin to subside in response to these initial moves, policymakers will end up raising rates too high, sending the economy into a recession and financial markets into a slump.
“When you’re wrong in one direction and you’re painfully wrong, you’re going to have to end up with too much heavy lifting to go in the other direction,” former Fed Governor Lawrence Lindsey was quoted saying by Bloomberg, as he put the odds of a downturn by the end of 2023 at above 50%.
To recap: a quarter percentage point hike is expected to cause little or no turbulence across markets next week, and possibly embolden further risk-takers in stocks to bonds, forex, and commodities.
A half percentage point hike will have some serious consequences, with gold, possibly even oil, plummeting amid a renewed crash on Wall Street. Inflation could pause briefly too - but more will certainly need to be done by the Fed if doesn’t want any subdued price pressure to come roaring back.
As RBC commodity analyst Michael Tran told the Australian Financial Review, what seemed ridiculous just a month ago now seems possible.
“It is not unfathomable for prices to rocket to $200 a barrel by summer, spur a recession and end the year closer to $50,” he said, referring to growing fears of demand destruction to oil if crude prices kept climbing.
“To be clear, this is not our base case, but such a scenario does not sound implausible today,” Tran said. “Two weeks ago, such a notion would have been ludicrous. Brent traded in a $20 range over the past 24 hours. Nothing sounds crazy anymore.”
Oil: Closing Prices & Technical Outlook
Global oil benchmark Brent settled Friday’s trade up $3.09, or 2.8%, at $112.42 a barrel. For the week, Brent fell 4.6%.
West Texas Intermediate settled up $3.18, or 3%, at $109.20 a barrel on Friday. For the week though, WTI fell 5.8%.
“The previous week’s was WTI’s chance for glory and a tryst with destiny as prices tested $130 and we’ve seen then a plunge to $103 before a weekly settlement at $109,” said Sunil Kumar Dixit, chief technical strategist at skcharting.com.
Dixit said on the surface of it, the weekly closing in WTI could be considered “extremely bearish” if not for prices closing the week at the 23.6% Fibonacci retracement.
“Holding above this level can push oil higher to the 38.2% Fibonacci level of $113 and 50% level of $116,” he said.
Further upside for WTI will largely depend on the market's reaction to this 50% Fibonacci level of $116, as holding above that can extend the recovery to the 61.8% level of $120 and 78.6% level of $124.
“Rejection at the resistance levels of the 50% - 61.8% areas of $116-$120 may push WTI down again to $103,” Dixit warned. “Breaking and sustaining below these levels can expose oil to the $95 and $86 areas, which may be fair value sans risk premia.”
Gold: Closing Prices & Technical Outlook
The most-active gold futures contract on New York’s Comex, April, settled down $8.15, or 0.4%, at $1,992.25 an ounce on Friday. For the week, it gained 0.9%.
Spot gold fell $8.47, or 0.4%, to finish Friday’s trade at $1,988.55. For the week, spot gold rose 0.9%.
Dixit noted that the big move in spot gold that attempted to clear above the $2,074 high was deflated at $2,070, pushing gold down all the way to $1,958 on Friday, although the spot metal managed to settle the week at $1988, some $30 above the day’s low.
“Gold’s rise from $1,977 all the way up to $2,070, a rise of $93, followed by its fall to $1,958, which marked a decline of $112, indicates large volatility on the week,” said Dixit. “This is despite the absence of major percentage changes on the week or record high prices.”
For the week ahead, the trade is likely to monitor price action at between $1,974 and the $1,958 low, Dixit said.
“The minor range to watch is $1,958 to $2010,” he said. “Prices need to break and sustain above $2,010 for a retest of the $2,020 and $2,032 levels, which may be targeted by sellers again to hunt for lower levels.”
On the flip side, he said, weakness below $1,985-$1,980 will indicate selling bias towards a retest of $1,958.
“Breaking and sustaining below this level, the correction can extend to $1,934 and $1,900. Monday’s early hours of opening in Asia will be interesting to watch as markets are likely to open with gaps.”
Disclaimer: Barani Krishnan does not hold a position in the commodities and securities he writes about.