Volatility reigns amid uncertain economic backdrop

Another tumultuous week on the macro front saw commodities broadly lower. However, metals and energy found support on the prospects of easing monetary conditions.

Crude oil ended the week higher as officials moved to ease concerns around the banking system. The US government promised to protect bank deposits, which helped calm nerves and the Fed signalled it may pause interest rate hikes. While inflation remains high, the banking system tremors have increased the odds of a recession. When asked about the possibility, Fed governor Kashkari said it brings us closer. Sentiment was boosted by signs of stronger demand. US exports of crude oil and refined products surged to a record 12mb/d. Russia also reiterated its 500kb/d cut to output, which it now expects to run through June. However, the risk of a recession tempered the gains. The market is still waiting for a rebound in economic activity in China. While travel has picked up sharply, consumer spending has remained subdued.

European gas prices fell last week as concerns of supply shortages eased. Dutch front month futures are now below levels seen prior to the Russia-Ukraine war. However, the lower prices could curtail attempts to reduce demand further. European companies are increasing consumption as industrial activity improves. The move in European markets helped push North Asian LNG prices lower. Nuclear reactor restarts in Japan are also likely to weigh on gas demand.

European carbon ended the week unchanged. Compliance buying pushed prices higher earlier in the week. However, those gains were wiped out by strong selling after the weekly German EUA sale. Australian carbon prices were steady, with liquidity drying up as we get closer to the vote on changes to the Safeguard Mechanism. The Greens party, which is key to the legislation passing, is pushing for no new coal and gas projects to be approved before it votes in favour of the changes.

Copper trimmed its weekly gains on Friday amid renewed concerns over financial stability, with Deutsche Bank now signalling problems. Nevertheless, base metals gained last week as macro headwinds eased. In fact, the market is likely to see tailwinds increase in coming months. The potential shift in monetary policy should lead to further USD weakness, which is likely to increase investor appetite in the sector. The market continues to search for elusive signs of stronger demand in China. Inventories have started to retreat from a recent peak, suggesting demand is improving. Metals output also increased in the first two months of the year.

Gold pushed close to USD2,000/oz, as the banking sector issues raised expectations that the Fed will curb its rate hikes. The threat of recession, as well as a weaker USD has seen investors increase their allocation to the precious metal in droves. The inflows into gold-backed ETFs have risen sharply in recent weeks