Finally it was curtains down on the ?Washington Theatre? (given that the warring sides had no option but to somehow agree to raise the debt ceiling!) last week with President Obama signing the Bill into law which raised the US Government?s debt ceiling of $ 14.3 trillion allowing the US government to borrow to pay its crucial bills till 2013.
The denouement came with a rider: of about a $ 2.1 trillion deficit cutting plan spread over 10 years with no new taxes to raise the revenue of the Treasury. As any Keynesian would tell you, a deficit reduction in times of recession is a ticket for a ride into deeper recession. And the markets were Keynesians last week. The perceived inability of Italy and Spain to safeguard their countries? solvency and contain the debt crisis which is threatening to engulf them only added to the markets? nervousness.
The ?risk off? mode saw investors sell off commodities, equities and move their money to cash and debt. Nervous investors sought refuge in gold causing near-month gold futures to touch a high of $1683.5 per ounce during the week, though it eventually closed at $ 1650.2 per ounce by the end of the week registering a weekly gain of about 1.67%.
Though gold and silver are commonly bracketed as ?safe haven? assets, silver futures did not see much movement and on a weekly basis actually declined by 3.6%. Market nervousness was visible in the sell-off in the energy complex with the two benchmark Crude contracts WTI and Brent Crude sharply declining by 9.68% and 6.52%, respectively, over the week.
By the end of the week S&P had downgraded the credit rating of the US from AAA to AA+.
The US government has questioned S&P?s move and more action can be expected on this in the weeks ahead. While that was some more bad news for the markets, some relief came in the form of greater than expected rise in payrolls to 1,17,000 workers as compared to 90,000 workers as per forecasts.
That provided some support to the free-fall in the commodity futures across all categories. Near-month corn and wheat futures defied the market trend gaining by 3.74% and 1.19% over the week, their fundamentals overriding the general market sentiment. The mid-month and far-month (end of the year) contracts of the bellwether indicators, viz., gold, crude oil, copper are trading at almost the same price as the near-month contracts, reflecting the market?s weak belief in the possibility of global recovery.
On the other hand the mid-month and far-month contracts of key agricultural commodities like corn, wheat, soyabean are showing upward bias underscoring the markets? concern about the demand-supply mismatch going ahead. The major softs, cotton and sugar, incidentally are trading at the same level with a downward bias in the far-months. For quite sometime now the markets are convinced that the world will be dealing with excess supply of cotton and sugar this year and the soft far-month futures prices are merely reflecting this.
In the Indian commodity markets, good trading volumes were seen in chilli, kapas (cotton), soyabean, guarseed, turmeric, coriander and chana. Of these significant price movement was seen in guarseed, near-month futures contract of which lost by 4.67%. Near-month turmeric futures lost by more than 7% mainly on reports of stronger production this year combined with slack demand in the spot market. IMD report has said that the rainfall for the season so far has been 6% below normal . That could, in part, explain the bearishness in some of the agricultural commodities.
The author is senior economist, NCDEX. The views expressed are personal.