Markets caught in a commodity crossfire; consider these factors before investing

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Markets around the world experienced an exciting week due to the underlying influence from commodities. Since last year, commodities have encountered a cocktail of price fluctuations. What began in April 2020 with the price of WTI oil turning negative for the first time in history has now flipped 180 degrees, with oil prices reaching their highest level since November 2014 after OPEC+ chose to stick to their production plans. Natural gas soared and so did coal to record highs as the country dealt with shortages. These factors led to an energy crunch starting off a chain reaction.

Metals, particularly steel, which has already risen may see a further increase due to rising energy costs. Costs for cotton, sugar and coffee were driven up by poor weather conditions and shipping bottlenecks. The Bloomberg Commodity Index, in fact, reached an all-time high this week. According to Samco Securities, due to the current supply crunch and unchecked demand, soaring commodity prices are stifling growth and compressing profit margins for businesses. And the only way out as of now is to pass on rising input costs to the end-user.

Commodity-faced industries such as automobile, cement and paint manufacturers have already taken the first step. Furthermore, the price of cooking gas LPG was raised by Rs 15 per cylinder on Wednesday, while petrol and diesel costs surged to record retail rates. And this pattern is likely to be continued in the future as well, which may not pan out to be good for the end consumer.

“While rising commodity prices are of a benefit to few, their volatility and spillover consequences are definitely a concern for many, with markets bearing the brunt. Investors are on edge as the demand-supply imbalance widens, fearing that inflationary pressures could stifle the recovery. This raises concern since policy makers may be compelled to consider rate hikes sooner than forecasted to counteract rising inflation. When evaluating companies for investment, investors must consider these factors,” Samco Securities said in a note.

Event of the week

The RBI’s MPC mirrored FOMC’s tone to keep its benchmark policy rate intact. The accommodative stance on repo rates is maintained for the eighth straight time which also derived comfort out of the previous two inflation prints which have been below the 6% upper limit and has led RBI to lower its inflation forecast for FY22 from 5.7% earlier to 5.3% now. However, this time the committee’s approach appeared to be a textbook one, with liquidity management as the first checkbox on their agenda, followed by an increase in reverse repo. Going forward, if the Fed’s tone in November is as anticipated, December may be the period when the RBI begins to close the gap between repo and reverse repo rates.

Technical Outlook

After a heightened volatility seen in last week, the Nifty50 index closed positive for the week. The index managed to bounce from the support around 17450 levels after making a doji candle. Although Nifty is still trading overbought, it did not see any significant correction. Even major global indices have started finding support after a mild price and time correction. S&P 500 index in the last one month has corrected almost up to 6% and is now finding support around 4270.

“Traders are advised to maintain a bullish bias going ahead but should remain vigilant of any break of newly established support in global indices. Any break may trigger weakness in Nifty too. The support and resistance are now placed at 17500 and 18050,” said Samco Securities.

Expectations for week ahead

The Q2 FY22 results season is set to begin next week with large cap IT companies reporting their results first. IT stocks in India have been witnessing a strong uptrend over the past couple of weeks driven by expectations of a ramp up in deals and strong hiring which might continue the growth momentum. Further, rupee’s depreciation has also played its part in keeping the IT stocks in the green. But macro data on September CPI inflation, manufacturing and industrial production could dictate the index price for majority of the week as markets continue to consolidate in their tight range. Nifty50 closed the week at 17895.2 up by 2.07%.