Lingering Middle East tensions and upcoming US PCE figures set to test investors’ nerves next week

By Kaynat Chainwala, senior manager- commodity research at Kotak Securities

The escalation of the Israel-Iran conflict and repricing of Federal Reserve interest rate cut expectations kept traders on edge this week.

The Dollar held above 106 level as stronger than expected US retail sales and hawkish comments from Fed officials reinforced bets that the Fed will wait longer before starting to cut interest rates. Better than expected growth in retail sales in March and an upward revision in February figures underpin resilient consumer spending despite higher inflation and borrowing costs.

Federal Reserve Bank of Cleveland President Loretta Mester believes the Fed can hold interest rates steady, and Atlanta’s Raphael Bostic reiterated that it will be appropriate to lower borrowing costs toward the end of the year, while Minneapolis Fed counterpart Neel Kashkari said the central bank needs to achieve more confidence that inflation is declining before cutting interest rates and could possibly delay such a move until after 2024.

Prospects of rate cuts anytime soon dimmed sharply as Fed Chair Powell acknowledged the ‘lack of further progress’ on inflation this year. This, coupled with fresh conflict in the Middle East, spurred buying in the dollar and US treasuries, while the S&P 500 dipped below 5000 levels and Nasdaq plunged 5 percent.

COMEX Gold prices witnessed the fifth consecutive weekly gain and traded well above $2400 per troy ounce aided by geopolitical risks, robust Chinese demand (both investment and central bank), and a sharp rise in speculative buying (net longs at a four-year high). After the recent run-up, a pullback in gold prices is likely in case further escalation is avoided in the Middle East.

Not only the uptick in gold and industrial metals, but also a bullish demand outlook from the Silver Institute drove Silver to close the week with a 1.6 percent weekly advance. LME base metals extended gains for the third week in a row with some counters experiencing pressure on visible inventories on the LME in response to the latest sanctions while others benefited from concentrate tightness.

WTI Crude oil surged to $86.3 a barrel on Friday after unverified reports of explosions in Iran, Syria, and Iraq but erased all the gains and closed the week 3 percent lower at $83.5 a barrel as Tehran downplayed the attack, stating it is not compelled to react to the blasts. Crude oil prices largely remained under pressure this week despite discussions between the US and EU regarding fresh sanctions against Iran and the US reimposing oil sanctions on Venezuela.

Risks of a wider regional conflict run high as Israel had struck targets in Iran in response to an unprecedented missile and drone attack last weekend. Besides, a strong dollar and elevated yields as swaps are pricing in the first quarter-point cut by September and less than 45 bps total cuts for the year, do not bode well for market sentiments either.

While the Bank of Japan policy decision may be complicated by more than expected easing in CPI, better US Q1 GDP estimates and PCE price index figures may bolster the “higher for longer” narrative and further unsettle markets.

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