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All eyes on US elections and FOMC meet

Author: Veeresh Hiremath/Wednesday, November 14, 2018/Categories: Commodities

All eyes on US elections and FOMC meet

Since the beginning of this month, the global financial market including commodities has been keenly watching the developments in the United States of America from November 5 to November 9.

The first event was commencement of the US sanction on export of crude oil from Iran from November 4. As the sanctions came into effect, the US granted temporary waiver for import of Iranian oil to eight countries including India. This news, which was expected to have a positive impact on the global crude oil market, failed to cheer as oil production from US, Russia and Saudi Arabia simultaneously surged to 33 million barrels per day, a third of the global consumption of 100 million barrels per day.

Another American event that kept nerves taut was the US mid-term election, which was a litmus test for the Donald Trump administration. The Democrats took control of the congress in the mid-term election, while the Republicans retained control over the Senate. With the Democrats taking control of the congress, which is pro-interest rate hike, the Trump administration is set to witness strong opposition for his policies. This led to the rise in the dollar, thereby pressurising the commodities market. Gold and silver markets closed in the negative for six days consecutively with the gold and silver market heading towards the biggest weekly losses since mid-August.

Another important event was the US Federal Reserve’s policy meeting on November 7 and 8. It was expected that the Fed would raise interest rate by 25 basis points. However, the Fed maintained status quo on interest rates and hinted at a 25 basis points hike in December. The strong labour market conditions and inflation level, which is near 2 per cent of the Fed’s targeted rate, are conducive of a rate hike. In a scenario of rising interest rates, the dollar denominated commodities will suffer a setback and prices will fall further.

In the base metals segment, the markets remained gloomy with trade tensions between the US and China rising before the G20 summit in Argentina in the end of the month, where Presidents of both the countries are scheduled to meet. Chinese President Xi Jinping said he was willing to resolve issues with the US through dialogue if Washington respected its development path and interests. If the trade talks fail, then the US would be imposing tariffs on Chinese imports, which would further escalate the trade tensions between the two countries.

Veeresh Hiremath is head of research, Karvy Comtrade Limited

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