Market positive, agricultural commodities volatile

Non-Agri Commodities  

In the last fortnight, world market sentiments remained largely positive as the economic numbers released by the US showed that the US is on a path of growth. Besides, the Federal Reserve tapering its bond buying programme and signaling rise in federal funds rate somewhere by mid 2015 suggests that the US economy is improving. In addition, the geo-political tension between Russia and US eased a bit which led to positive movements across commodity markets, except precious metals.

In the domestic markets, favorable inflation data along with robust foreign fund inflows in equity markets led to appreciation of the currency. Further, selling of dollars by custodian banks and exporters along with Reserve Bank of India (RBI) maintaining its interest rates acted as a positive factor. However, dollar demand from importers and RBI intervening to buy dollars to increase it forex reserves capped sharp gains in the currency.

Coming to the performance of non-agri commodities in the past fortnight, we saw that Spot Gold prices declined by around three per cent on rising US equities and ease of geo-political tensions between Russia and the US. Also, the Gold Investor Index, which measures the balance of customers adding to gold holdings over those reducing them, was down to 53 in March from 53.5 in February. A reading of 50 signals an equal number of net gold buyers and sellers.

Prices were pressured further on account of outflows from ETF's as holdings managed by SPDR Gold Holdings Trust declined by around 0.73 to 810.98 tonne as on April 3, 2014. On the domestic bourses, prices fell by more than four per cent owing to the rupee's appreciation.

Spot Silver prices declined by more than two per cent in the last fortnight, due to the strength of the DX, although the base metals pack traded positive during the same time frame. Besides, reduced appeal for silver as a safe haven was largely the main factor exerting downside pressure on prices. In addition profit booking in gold and reduced geo-political tensions pushed the metal lower.

During the last fortnight, LME Copper prices jumped by more than two per cent due to concerns of supply disruption after an earthquake in the world's biggest producer, Chile. Also, decline in LME inventories by 2.1 per cent to 260,100 tonne supported gains. However, weak manufacturing data from the US, China, UK and Euro Zone capped sharp gains. Also, rise in risk aversion in the markets along with strength in the DX acted as a negative factor. MCX copper prices rose by 1.4 per cent in last fifteen days despite rupee appreciation and closed at Rs.405.9/kg as on April 4 at 4:30 pm IST.

Nymex Crude oil prices gained around one per cent and largely traded positive in the last fortnight. This positive move was on account of US factory activity that accelerated for a second straight month in March and auto sales surged, the latest signs the economy was regaining its footing after a brutal winter.

However, the sharp upside in the prices were capped on account of the restart of Libya's eastern oil ports which could release about 600,000 bpd of crude, bumping up the OPEC producer's output from around 150,000 bpd, but still far from the 1.4 million bpd it produced in July. On the domestic bourses, prices declined and largely traded volatile to negative on account of rupee appreciation.

Outlook

In the coming fortnight, we expect precious metals, to head lower while crude oil prices to trade sideways on the back of strength in the DX and positive growth in the US.

In case of crude oil restart of Libyan supplies will act as a negative factor and exert downside pressure on prices.

Base metals are likely to trade on a mixed note as positive economic data from the US will cushion sharp downside or even reversal in prices.

Agri Commodities 

Agri commodities space witnessed a good deal of volatility in the domestic as well as the overseas markets. Erratic climatic conditions in India during February-March have led to a substantial losses of the standing rabi crop. Also, fears of emergence of El-Nino conditions in the coming monsoon season have led to fears of lower rains this year. On the other hand, arrival pressure of the rabi crops have helped ease the prices of rabi crops.

On the regulatory front, the Forward Markets Commission (FMC) has discontinued trading in agri as well as non-agri commodities on all Saturdays wef 1st April 2014. Also, the regulator has allowed trading in some agri commodities in the evening session which are linked to international markets.

Among agri commodities, oilseeds gained over the last fortnight. Soybean witnessed gained 3.6% on the back of tight supplies in the domestic markets. Firm overseas markets due to strong demand for US soy bean also supported prices. Mustard prices gained 1.3% tracking gains in the edible oils while the arrival pressure of the new season crop capped sharp gains.  In the edible oils, Soy oil gained 0.8% tracking gains in the soybean prices. However, strengthening Rupee capped the upside. CPO remained weak taking cues from a strong Rupee and weak global palm oil markets which have declined on the back of weak export demand. However, higher domestic edible oils restricted a sharp fall in the prices and settled 3% lower.

Among spices, coriander prices gained on crop damage and buying by stockists. However, prices declined from higher levels on profit taking coupled with rising arrival pressure and settled 4.4% higher. Turmeric witnessed mixed trades. Prices which declined sharply in the first half of the fortnight due to arrival pressure and huge carryover stocks, recovered from lower levels on lower level demand by the stockists and settled 0.5% lower. Jeera remained under downside pressure on record output coupled with arrivals of the new season crop. However, overseas demand supported prices at lower levels and settled marginal 0.1% lower.

Among softs, Sugar was the biggest gainer posting 6.2% gains on the back of rising summer demand from the bulk consumers as well as lower output estimates coupled and strong export demand for raw sugar. Cotton futures remained under downside pressure and lost 3% tracking weak Kapas prices due to increasing arrivals. Kapas on NCDEX declined sharply by 6%.

Chana futures traded on a mixed note. Reports of crop damage due to unseasonal rains and hailstorms supported prices. Also, reports that NAFED procuring chana in various state lent support to the prices at lower levels. However, prices declined from higher levels on increase in arrivals leading to liquidation of long positions. Also, increasing stocks on the NCDEX warehouses pressurized prices further and settled 2.7% lower.

Outlook

We expect prices of most of the Rabi crops like Chana, Mustard Seed and Coriander to remain under downside pressure on increasing arrival pressure of the new season crops. Turmeric may also decline due to weak demand due to huge carryover stocks while lower level demand may support prices. Jeera prices may recover from lower levels on overseas while record high output as well as arrival pressure may pressurize prices. Soybean may trade with a positive bias supported by tight supplies in the domestic as well as overseas markets. However, weak soy meal export demand may pressurize prices at higher levels. Expectations of shift of Chinese import demand from US to South America may also pressurize prices at higher levels.

Prices may take cues from any data on the extent of crop damage due to the recent unseasonal rains and erratic weather conditions. Prices may also take cues from movement in the Indian Rupee.

Naveen Mathur is Associate Director-Commodities and Currencies at Angel Broking.