It is likely to start falling again over the next couple of days as it rises amid speculation that the Federal Reserve may announce some hawkish measures at its monthly policy meeting that favors dollar yields and US Treasuries.
Meanwhile, oil investors will try to move on from the three-week saga of Hurricane Ida, which as of Friday halted a quarter of production in the US Gulf Coast. China’s indications that it will use more stocks to avoid expensive oil imports also weighed on crude oil prices.
The Federal Reserve’s Federal Open Market Committee, or FOMC, begins on Tuesday with a two-day meeting that concludes with a policy announcement and Chairman Jay Powell’s press conference on Wednesday.
While there has been speculation for months, that the central bank will announce a scaling back of the $120 billion bond and asset purchase program that has been in place since the start of the Covid pandemic in March 2020.
The Fed’s timetable for tapering economic stimulus is significant because it represents a first step toward eventually raising interest rates, which have been near zero for the past 18 months.
The most powerful officials within the FOMC, including the Fed chair, have done everything they can to delay the rollback of stimulus using the excuse of a delta-mutated coronavirus resurgence. Also this time, the Fed may issue a soft statement on tapering of asset purchases, followed by more mixed messages from Powell. Critics expect that the Fed will not make any announcement of diminishing asset purchases until November.
While oil and other major commodities got off to a nervous start in Asia in Monday’s trading with holidays in mainland China, Japan and South Korea affecting liquidity. Indeed, the intense holiday schedule among major North Asian companies is likely to affect liquidity somewhat throughout the week, which could exacerbate market movements.
Risk aversion prevailed in risk markets after US Treasury Secretary Janet Yellen repeated her warning that the economy could fall into recession if Congress does not reach an agreement soon to raise the country’s debt limit.
Jeffrey Haley, who heads market research for Asia at online trading platform Oanda, said:
The list of drift sharks (SE:6050) is long, and it begins with growing clamor from the US about the debt ceiling. The high debt ceiling was a rubber stamp, but in the US, that is no longer the case.”
As for the Fed’s gradual decline, Haley added, it would be naive to think that “having the world addicted to countless amounts of money at zero percent and in support of the stupidest investment decisions over the past decade, plus, the Fed can put that genie.” The bank is at the bottom with no effect.”
The most active US gold futures contract, December, fell $2.65, or 0.2%, at $1,748.75 an ounce on the New York Stock Exchange, extending last week’s decline of 2.3%.
On the other hand, it fell 1.8 percent, aluminum fell more than 1 percent, and platinum fell about 2 percent.
Oil prices were also under pressure after Chinese Premier Li said over the weekend that China would use “market tools” to stabilize commodity prices. This appears to be a coded message to release more oil and mineral supplies from stocks in exchange for imports.
While New York-traded West Texas Intermediate crude, the US oil benchmark, swung below $71.15 a barrel, down 67 cents, or 1%. WTI ended up 3% higher last week.
It traded in London, the global benchmark for oil, at $74.73, down 61 cents, or 0.8%. Brent crude also rose about 3 percent last week.
“As a price insider, not a price maker, there is a lot China can do to influence prices in the medium term,” Halley said.
“On a day when there will be less liquidity due to holidays, nervous markets and higher US bond and dollar yields ahead of the FOMC meeting, there will be a significant impact.”
Also, analysts said a sharp correction in US stocks could set the pace for risk-off across the board, including in oil, which could lead to a rally in gold.
As stock analyst Brian Gilmartin said: “Personally, I would like to see a 5% to 7% correction within the 500 Index between now and October 10, just to reset expectations.”
Gilmartin said that while he expected the S&P 500’s earnings for the third and fourth quarter of 2021 to be “good,” that doesn’t mean markets will continue to take off.
He added that just because the conditions for a “market bubble” do not exist, does not mean that the S&P 500 cannot see a fundamental correction.
Disclaimer: Barani Krishnan uses a range of opinions outside of his vision to bring diversity to his analysis of any market. For the sake of neutrality, he sometimes presents conflicting views and market variables. Nor does he trade in the commodity and stock markets he writes about.