Commodities remained under pressure as UBS Group AG’s emergency purchase of Credit Suisse Group AG failed to calm worries over a banking crisis that’s hurting the appeal of risk assets.
(Bloomberg) — Commodities remained under pressure as UBS Group AG’s emergency purchase of Credit Suisse Group AG failed to calm worries over a banking crisis that’s hurting the appeal of risk assets.
Oil sank, with US benchmark West Texas Intermediate plunging below $65 a barrel to the lowest since late 2021. Grains fell, industrial metals were mixed and European gas hit the lowest in more than 1 1/2 years. Gold — which benefited from the banking turmoil with a 6.5% surge last week — rose above $2,000 an ounce for the first time in a year on demand for havens.
After reaching a record last year following Russia’s invasion of Ukraine, the Bloomberg Commodities Spot Index has dropped by more than a quarter as concerns over a global slowdown, higher interest rates, and a huge selloff in natural gas dragged the gauge lower. The upheaval in the banking sector — marked by the swift collapse of several US lenders and subsequent crisis at Credit Suisse — then deepened the rout, although bullion was a beneficiary.
With a crisis of confidence threatening to spread across financial markets, the Swiss government brokered the deal for Credit Suisse over the weekend, including a guarantee for potential losses from the assets UBS is taking over. The Federal Reserve and five other central banks also announced coordinated action to boost liquidity in US dollar swap arrangements to ease strains in the financial system.
Despite those efforts, financial markets remained under pressure on Monday.
“When banking suffers then credit suffers and then the economy suffers,” said Bjarne Schieldrop, chief commodities analyst at SEB AB. “So less optimism on economic growth is warranted.”
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The slump in commodities has come despite China’s rapid economic revival after officials ditched the Covid Zero policy late last year. Beijing cut the amount of cash banks must keep in reserve at the central bank last week to support lending and strengthen the recovery.
The trajectory for raw materials this week will mostly hinge on how the Credit Suisse deal is received, as well as on the outcome of the Fed’s rate decision on Wednesday. Although US policy makers had signaled their willingness to raise rates by 50 basis points to contain still-hot inflation before the banking crisis erupted, market watchers now expect a smaller increase, or perhaps even a pause.
In their weekend statement, the Fed and partner central banks said they’ll increase the frequency of seven-day maturity operations from weekly to daily. The new arrangements will act as “an important liquidity backstop to ease strains in global funding markets,” they said.
“Participants are still not fully convinced on whether recent moves by authorities can backstop further banking fallouts,” said Yeap Jun Rong, a market strategist at IG Asia Pte in Singapore. Investors are now wondering whether to buy the dip, Yeap said.
The worries over the banking sector have prompted Goldman Sachs Group Inc. — one of the most bullish banks on crude — to trim its forecasts, with the lender no longer seeing prices at $100 in the year ahead. That’s even with it now expecting OPEC producers to only increase output in the third quarter of 2024, rather than in the second half of 2023.
Oil Spread Slumps Most Since January in Latest Sign of Weakness
Gold’s jump last week was its biggest since the early days of the pandemic. Heading into the latest banking crisis, precious metals were dramatically under-owned after a big selloff in February, said Ole Sloth Hansen, head of commodities strategy at Saxo Bank A/S. A shift to a more dovish outlook from Fed policy makers would benefit non-yielding bullion.
In other commodities, iron ore fell after Chinese regulators renewed warnings to companies against hoarding and price gouging in response to a recent surge in the steel-making material. Wheat retreated after the renewal of a deal allowing Ukraine to ship rains and other crops from key Black Sea ports, although there was uncertainty over the length of the agreement.
–With assistance from Winnie Zhu, Yongchang Chin, Paul Burkhardt, Paul Wallace and Eddie Spence.
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