Coronavirus pandemic |'Commodities slump, volatility likely to remain as panic intensifies'

© Sunil Matkar Coronavirus pandemic |’Commodities slump, volatility likely to remain as panic intensifies’

Ravindra Rao

Commodities have been on a downward spiral for the last few weeks but the selloff has intensified lately, as panic grips global financial markets.

The spike in infections and restrictions imposed to limit the spread of the virus have fuelled recession concerns, while market players remain unconvinced that monetary easing and fiscal measures will be enough to stave off a major slowdown.

As per the latest data, global cases have crossed 1,82,400 while deaths exceed 7,100. With the sharp spread in the last few days, global cases are now higher than those reported in China, where the outbreak began.

In the last few days, several central banks have cut interest rates and announced other measures to boost liquidity and mitigate the economic fallout from the virus outbreak.

We started the week with the Fed announcing a surprise 1 percent interest rate cut just days ahead of a scheduled meeting. The decision was followed by Bank of Japan announcing larger bond purchases.

Central banks are taking hurried steps to support the economy, however, these drastic measures have added to the panic in financial markets.

Reuters/CRB commodities index hit a low of 132.33 points on March 16, the lowest since June 1999. Crude oil and industrial metals have been under pressure for the last few weeks, joined lately by precious metals.

The growing panic is evident from volatility in major commodities. Crude oil is leading the flock with annualised volatility near 170 percent.

In industrial metals, nickel has been the most volatile, with annualised volatility near 45 percent, while copper, aluminum, nickel and zinc volatility stands at near 20 percent.

Gold and silver are late entrants to the slump in the commodities market.

Gold, which surged to 2012 high last week, has corrected nearly 15 percent and hit a low of $1,450/oz this week. Gold rose in the last few days on safe-haven buying and monetary easing by major central banks. However, as the panic intensified, market players shunned all asset classes in favour of cash.

Silver, which has a dual appeal of being a precious metal as well an industrial metal, bore the brunt of selloff across both the complexes and slipped over 12 percent on March 16, marking its biggest one-day slump since 2013.

Leaders need to act unanimously, as the outbreak has become a global issue and risk sentiment may stabilise once we see concrete steps. Alternatively, risk sentiment may improve if there is a slowdown in fresh cases or a treatment is found. Till either of the scenarios materialise, volatility in commodities is likely to stay.

(The author is VP- Head Commodity Research at Kotak Securities.)

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