Trade war triggers an across-the-board risk aversion to commodities

Oil, metals, gold-silver fall 2-3%, cotton seheds as much as 5% as dollar strengthens

Trade war triggered by the US has hit commodity prices hard, and most of them, including bullion, metals, oil, and even agri-commodities, have fallen to risk aversion.   

On Friday, US President Donald Trump announced a 25 per cent tariff on up to $50-billion worth of Chinese imports. China immediately retaliated with a similar move.

In the last two days, the prices of oil, gold-silver, other metals, and most other commodities fell 2-3 per cent, while cotton prices fell over 5 per cent.     

Nigam Arora, a US-based analyst and author of Arora Report, said, “Fears of a trade war, concerns  over the fact that the Organization of Petroleum Exporting Countries (Opec) and Russia may start producing more oil at a time when the US oil production is rising, and the strengthening dollar have hurt the sentiment and commodities fell.” Since commodities are priced in dollars, they are moving inversely to it, said Arora.

Apparently influenced by China’s move of announcing a similar tariff on the goods imported from the US, India has decided to counter the US tariff. India has informed the World Trade Organization that it has finalised a list of 30 items, valuing $240, imported from the US to impose retaliatory tariff, in an attempt to counter the American move of unilaterally hiking duties on Indian steel and aluminium.

Gold suffered majorly due to this risk aversion. The US Federal Reserve has decided to increase rates and indicated two more hikes to be implemented this year. This has hurt the gold sentiment. Internationally, the prices have hit a low of $1275 per ounce before improving to $1280 (till 5 pm on Monday).

In Mumbai’s Zaveri Bazaar wholesale market, gold on Monday opened over 1 per cent lower and closed at ~30,765 per 10 gram. Even gold silver ratio (gold:silver), which strengthened in the past few days at 79, fell again to 77 due to increased silver sale.

Arora believes, “Most likely gold will move range-bound, unless there is a bigger move in the dollar or inflation or a geopolitical crisis.”

Strengthening of the dollar was a major trigger. The dollar is bolstering a trade war, which, in turn, will improve the US fiscals and the rate hike will bring more money in the US. The dollar index was trading at 95 on Monday, the highest after November 2017.

Gnanasekar Thiagarajan, director at Commtrendz Research, observed a general risk aversion in commodities and other assets as well. According to him, “It is the general risk aversion and offering safety to the dollar, following the ongoing trade dispute. That is why it is a sell-off across the board, including gold, which is considered safe even in times of risk aversion.”
The situation is different for oil. More than risk aversion and strengthening of the dollar, what worries oil market bulls is that the Opec may increase production. The Opec members are meeting on June 22 to review its nearly 18-month-old production cut.

Crude oil demand now outstrips supply, and Opec members will weigh options whether to lift the 18-month-old production cap to stabilise prices. The market is ripe with reports that Saudi Arabia wants to pump in more oil, as does Russia, a key non-Opec member. But poorer Opec members would rather see prices continue to rise.

Oil producing countries’ fiscal situation is still not comfortable, and many of them, especially the big ones, want more dollars. The speculation of higher production could lead to falling oil prices. Even the WTI or shale oil from the US was around 12-13 per cent cheaper, leading to arbitrage. This may also warrant correction in Brent prices.

Thiagarajan clearly sees some more sell-off in time to come. He believes the impact has just started. “The recent outlook from central banks in the euro zone and Japan showed that the dispute was starting to have an impact,” said Thiagarajan, and hence, “some more fall is likely.”