Futures volatile on geo-political instability

Commodity prices were volatile in domestic markets today after news of North Korean firing at a South Korean island. The standoff strengthened the dollar against other global currencies.

Globally referenceable commodities, including precious metals, base metals and energy, traded on the Multi Commodity Exchange (MCX) first slumped by up to two per cent in early trade, amid fear of retaliatory actions by South Korea, but recovered later in the day. A majority of commodities still ended the first session on the MCX with a price decline of up to one per cent.

These commodities fell in global markets as well. Copper dived 1.5 per cent in London and three per cent in Shanghai due to a surge in the dollar. Three-month copper on the London Metal Exchange fell $125 or 1.4 per cent to $8,165 a tonne. LME zinc lost 1.7 per cent to trade at $2,101, while its Shanghai equivalent fell by its daily limit to 17,015 yuan. Gold recovered from early losses of more than half a per cent to trade down 0.1 per cent. Crude oil fell towards $82.87 ($0.37 down) after hitting a high of $83.49 and a low of $82.59 a barrel.

However, said Gnanasekar Thiagarajan, Director of commodity broking firm Commtrendz, “Between 1-2 per cent of volatility has become normal for commodities from sectors like precious metals, base metals and energy.”

Commodity markets were already under pressure from a firming greenback on anxiety about euro zone debt, but the attack lifted the dollar and US 10-year Treasury futures further. The US currency rose 0.5 per cent against the euro to trade at $1.3542. The euro traded between $1.3527 and $1.3633 from $1.3620 late on Monday. Against the rupee, the greenback gained, to trade at 45.60 against 45.40 yesterday.

Prices on domestic platforms are directly correlated with global markets. The movement also depends largely on the dollar, as all these commodities are import-oriented, said Thiagarajan. Generally, global hedge funds square off their position in December, prior to the Christmas holiday. But the bailout package to protect the Irish economy will push precious metals up, said Dharmesh Bhatia, an analyst with Kotak Commodities Services Ltd.