Supply concerns keep commodities higher and inflation sticky

Published on May 22, 2024 by Sreeja Roy Chowdhury , Debarati Dutta , Mahesh Agrawal , Jenil Mehta , Archana Anumula and Somya Dixit

Price performance over April 2024

Global market overview

The equity market retreated in April even as the earnings season started on a strong note with most of the companies reporting better-than-expected earnings. Expectation of a rate cut soon and geopolitical concerns weighed on sentiment. Asia ex-Japan performed better. Commodities continued the positive run led by industrial metals on supply concerns and stronger demand. Gold could remain volatile, taking cues from geopolitics and expectations of Federal Reserve (Fed) rate cuts. Tensions in the Middle East could continue to provide a floor for energy prices.

The USD continued to trade strongly against major currencies as expectations of a rate cut eased. Inflation remained higher than the Fed's target rate, triggering the agency to adopt a hawkish tone at its last meeting. Speculation that the European Central Bank (ECB) and the Bank of England (BoE) could start rate cuts before the Fed could continue to support the USD in the short term. However, we believe that most regions' rate cuts remain data-dependent and that uncertainty could persist in the coming months.

Charts for the month

Source: Investing.com, IMF April 2024 outlook

Equity market

• Review: April saw a widespread correction in global equities, notably a 7% drop in the US small-cap index and a 4% decline in the S&P 500, driven by readjusted rate-cut expectations and concerns over higher interest rates for longer. Despite this, the US market experienced a robust earnings season, according to FactSet,i with 77% of companies reporting actual EPS above estimates, matching the five-year average. The healthcare and information technology sectors performed particularly well. European indices also corrected, except for the UK Index (FTSE100), which rose 2.7% due to strength in energy and value stocks and increased earnings expectations.

• Outlook: In May, investor focus would be on China and Hong Kong, where efforts to revive property markets could reveal cheap value opportunities. Geopolitical tensions and speculation around further rate cuts would also dominate discussions. In addition, attention will likely be on expectations of a BoE rate cut, potentially fuelling a rally in UK stocks. Monitoring market trends remains crucial amid the ongoing volatility.

Commodities market

• Review: Industrial metals performed relatively well, with the London Metal Exchange (LME) Index rising 13% m/m in April, as metal prices benefited from tightening supplies, shrinking inventories and recovering demand. Copper led the gains among base metals, with prices moving above USD10,000/t towards the end of the month. Prices rose 12.7% m/m in April, primarily due to disruptions in mine supply and expectations of robust demand this year, especially from the green energy sector. Among other base metals, prices of aluminium also gained sharply last month as the LME banned the delivery of new Russian metals to the exchange. Meanwhile, in energy, US natural gas performed well, with prices rising by 13% m/m last month as expectations of warmer-than-usual temperatures boosted the nation's demand outlook. Meanwhile, in agri commodities, sugar prices fell sharply, by 12% m/m in April, on improved supply, supported by weather in the main producers - Brazil, Thailand and India.

• Outlook: Industrial metals are expected to continue to perform well, as fundamentals remain supportive. However, risks from China continue as copper inventories remain elevated, while the Fed's higher-for-longer narrative could put downward pressure on copper prices. The gold market is expected to remain volatile on mixed expectations in the market about the Fed starting to cut rates in June. Meanwhile, crude oil prices are expected to perform better over the coming weeks due to continued escalations in tensions in the Middle East.

FX market

• Review: The USD rallied over most of April due to a firm inflation print in March, triggering expectations that the Fed may adopt a hawkish tone in May. However, the markets have interpreted Fed Chair Powell's speech on 1 May as a dovish stance, as it ruled out rate-hike scenarios and reinstated the possibility of easing rates in 2H 2024. As a result, the USD came under bearish pressure. The JPY remained weak in April, with the USDJPY crossing 160, but by the last week of the month, it had rallied below 160. Although not officially announced by the Japanese authorities, markets interpreted this a result of intervention. This, coupled with the USD sell-off after the FOMC meeting, favoured the JPY, exerting pressure on the USDJPY. The EUR remained broadly stable as regional growth continues to recover. On the other hand, Asian currencies were under pressure from the USD as markets slashed expectations on the number of Fed rate cuts this year.

• Outlook: The JPY will likely remain subject to intervention by the financial authorities as its struggle in the free market against the USD continues. Markets expect a hawkish stance by the Reserve Bank of Australia (RBA) in May given stickier inflation of late, likely underpinning gains in the AUD after the policy meeting. US payrolls data released on 03 May has renewed expectations of rate cuts this year. The markets believe that softer labour-market data and Powell's indication that the Fed remains data-dependent could add bearish pressure on the USD in the coming months. Policy divergence from the Fed's could exert bearish pressure on the EUR and the GBP, as the respective central banks are slated to start easing policy rates earlier than the Fed. A longer hold by the Fed would also mean that Asian currencies may continue to depreciate against the USD.

Debt market

• Review: April witnessed a large sell-off in bond markets across major economies. US 10y Treasury yields skyrocketed at end-April (+49.2bps from end-March) owing to sticky inflation and markets expecting the Fed to keep rates higher for longer. This sharp rise in US yields had a positive spillover effect on the European bond market. German 10y bund yields, the Eurozone's benchmark, moved upwards, breaching the 2.5% mark in April. UK gilts rose more than 40bps from end-March, the highest jump since the beginning of the year. In Japan, bond yields remained higher as of end-April even as the Bank of Japan (BoJ) kept rates unchanged; markets now expect the BoJ to hike rates in 3Q 2024.

• Outlook: Yields are expected to keep moving upwards in May as the US economy remains resilient with the Fed keeping rates unchanged at the May meeting. The markets are now pricing in one rate cut in 2024. The IMF's April outlook shows that although inflation is falling in advanced economies, it could still stay higher than the long-term target of 2% over the next 12 monthsi. German bund yields and UK gilts are also expected to remain elevated, as markets now expect fewer rate cuts by the ECB and the BoE this year. JGB yields are expected to remain under upward pressure, driven by the BoJ's rate-hike path and pace of quantitative tightening.

Key data releases:

Indicator	Country	Release date	Consensus (actual)	Previous
CPI (% y/y, April, final)	US	15-May-24	-	3.5%
	Eurozone	17-May-24	2.4%	2.4%
	UK	22-May-24	-	3.2%
	China	11-May-24	0.1%	0.1%
	Japan	24-May-24	-	2.7%
Manufacturing PMI (Index, May, flash)	US	23-May-24	-	50.0
	Eurozone	23-May-24	-	45.7
	UK	23-May-24	-	49.1
	China	31-May-24	-	50.4
	Japan	23-May-24	-	49.6
Retail sales (% m/m, April)	US	15-May-24	0.4%	0.7%
	Eurozone*	7-May-24	0.6%	0.8%
	UK	23-May-24	-	0.0%
	China^	17-May-24	3.8%	3.1%
	Japan	31-May-24	-	13.5%
GDP (% q/q, Q1, 2nd estimate/final)	US	30-May-24	-	0.4%
	Eurozone	15-May-24	0.3%	-0.1%
	UK	10-May-24	0.4%	-0.3%
	Japan	16-May-24	-	0.1%
Policy rate decisions (%, May)	US	1-May-24	5.50% (A)	5.50%
	UK	9-May-24	5.25%	5.25%
	China**	20-May-24	-	3.45%
Major events due in May
ECB minutes for April	Eurozone	10-May-24
BoJ MPC minutes for April	Japan	2-May-24
FOMC minutes for April	US	22-May-24
General elections (Phases 3, 4, 5 and 6)	India	07, 13, 20, and 25 May
Note: * Mar release; ^ % y/y; ** 1y LPR. Dates are reported in local time zone
Source: National Statistical Offices, Trading economics

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Source

• Earnings_Insight_050324 (factset.com)

• World Economic Outlook, April 2024: Steady but Slow: Resilience amid Divergence (imf.org)

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