Commodity price slump triggers investor caution

Risk-off sentiment among global investors hits equity markets, demand for gold rises

A slump in commodity prices has triggered risk-off sentiment among global investors, hitting equity markets and pushing up demand for safe-haven assets like gold.

Most Asian and European markets dropped on Friday, while the dollar gained against most emerging market currencies. The benchmark BSE Sensex lost 267 points or 0.9 per cent to end at 29,858.8; the Nifty 50 on the National Stock Exchange fell 74.6 points or 0.8 per cent to 9,285.3. The rupee fell 0.3 per cent to close at 64.37 against the dollar. Foreign investors sold shares worth Rs 364 crore. Commodity and oil stocks witnessed selling.

While oil and other commodity prices were seen stabilising on Friday, the weekly losses were enough to spook investors, raised concerns over the global economy’s health. A five per cent drop during the week saw Brent crude prices fall to their lowest level since November 2015, erasing all gains since the Organization of the Petroleum Exporting Countries (Opec) signed a six-month deal to curb production and ease a global glut. Surging shale gas output in the US was seen as the trigger for a slump in oil prices. Higher US output threatened to offset the supply cut by Opec and Russia.

The fall in oil prices spread to other commodities. Iron ore lost 12 per cent during the week in Singapore, its sharpest fall since November, when prices had come off on concerns over the demand in China. 

Copper traded at the lowest level in five months at $5,567 a tonne. Zinc fell to the lowest level in a month at $2,578 and nickel traded at a 11-month low of $8,960 a tonne. Domestic oil explorers ONGC and Oil India fell nearly three per cent each. Commodity stocks Hindalco, Vedanta and Hindustan Zinc dropped nearly four per cent each.

“Oil prices have seen a drastic fall of more than 10 per cent in the past few weeks. With high oil inventories in the US at around 530 million barrels, Opec and other producers are ruling out deeper supply cuts,” said Prathamesh Mallya, chief analyst at Angel Commodities.

Experts said the fall in commodity prices and the increasing risk-off bets are also due to concerns over US policies. “The US president is at a tug of war with the US Federal Reserve, with his publicly stated view of keeping interest rate low and not favouring a strong dollar. He faces similar issues in general with the US administration. This has shaken the hedge funds' confidence. Prices will stabilise when confidence returns in (President) Trump's policies,” said T Gnanasekhar, director, CommTrendz Research, a risk advisory entity.