It was one of those weeks when the overall global economic situation dominated the mood of the markets rather than fundamentals of any markets, commodity markets included. Over the week one of the benchmark commodity indices viz., CRB CCI lost by a whopping 9.37%. All the major commodities in all the segments viz., energy, precious metals, softs and grains tumbled by more than 6%. The week began with market participants awaiting the Fed?s announcement on monetary policy to see if another round of quantitative easing is announced. But the FED threw a surprise on the market by using a subtle policy maneuver mimicking a 1961 policy known as ?Operation Twist? by announcing that it would buy longer-dated bonds (between 6 and 30 years of maturity) worth $ 400 billion and sell an equivalent amount of near-dated securities.
The impact of this on liquidity would be same as Quantitative Easing in that by reducing the supply of long-term bonds, prices of these would go up and yields on these come down signaling lower long-term interest rates. The expectation is that this would encourage borrowing and spending and especially kick-start the housing market.
However, the markets just went into a sell-off mode after this announcement as they realised that the Fed has exhausted all tools for stimulating the economy and it is now left to the Congress to use the fiscal policy to revive the US economy. Given the political immaturity displayed by both the parties in the recent past, the markets lost all confidence causing the dollar to strengthen against the euro by 1.09% over the week, causing all commodities to tumble. The crisis of confidence that gripped the global commodity markets last week was best reflected in the sharp fall of copper futures, which fell by 16.11%. Gold was no longer considered as safe and the near-month contract on COMEX fell by 9.77% over the week to close at $ 1637.7 an ounce. Silver near-month futures took an even more severe beating falling by 25.98% over the week. Alarmed by such sharp falls, the Chicago Mercantile Exchange hiked margins on gold, silver and copper futures by 21%, 16% and 18%, respectively with effect from close of business of 26th September. The sell-off was seen in WTI Crude which fell by 9.05% over the week to close at $ 79.85 per barrel by the end of the week. The near-month contract in Brent Crude which stood at $ 111.71 per barrel at the beginning of the week fell by 6.92% to close at $ 103.97 per barrel by the end of the week.
In the Indian commodity markets one of the important developments was the announcement of the Forward Markets Commission (FMC), the regulator of the commodity derivatives market, as the regulator for the electronic spot exchanges, which have been largely self-regulated. The move was welcomed by the spot exchanges. In the futures market, in the spices complex, near-month coriander futures declined by 6.16% over the week closing at R5,402 per quintal. Cumin futures closed at R15,558 per quintal, lower by 0.71% over the week. Pepper futures gained by 1.70% on a weekly basis to close at R36,305 per quintal.
The author is senior economist, NCDEX. The views expressed are personal.