Central Banks Draw Rate Cut Card to Spur Demand as World Grapples COVID-19, Commodities to Shine?

The commodity market is seeming to be poised for a slight recovery post tumbling largely due to the impact of the coronavirus outbreak over the global economic activity. The slowdown in the global economy is now prompting Central Banks across the globe to ease the monetary policy.

Monetary Ease Pushed Price Slightly Up

Many statements from various Central Banks are now matching the tone with the United States Federal Reserve statement of “taking the appropriate action” to boost the economy.

In the status quo, the United States FED surprised the market with a sudden cut of 50 basis points or half a per cent in the benchmark interest rate, and the statement from the FED made it clear that the rate cut is not because of what is happening but is due to what can possibly happen in the future, reflecting that the scale of damage of the outbreak could be worse than it seems presently.

The Bank of Japan, Bank of England, is matching the tone with the FED and looking dedicated to easing the monetary policy. The Reserve Bank of Australia (or RBA) also trimmed the interest rate by 25bps in the wake of lower economic activities, emerged from the impact of the coronavirus outbreak.

The outbreak, which started as an epidemic in China soon take the shape of a pandemic and spreading like wildfire across the globe, hitting many economic activities such as manufacturing.

As per the latest report of the World Health Organization (as on 3 March), there are now 90,870 registered cases across the globe (1922 new), while in China alone there are 80,304 confirmed cases (130 new) leading to a death toll of 2946.

Across the globe, there are now 72 countries under the net of the coronavirus (8 new), and WHO assesses that the virus in the Eastern Mediterranean Region is of great concern.

China Government Stimulus to Extend Support?

While this is a bad situation for commodities, the market now anticipates that the governments across the globe would provide required stimulus after a brief plunge in the market, and it seems that the market anticipation is coming true.

The industrial and commercial centre of southern China- Guangzhou declared subsidies for car purchases, in a move to stimulate demand. The city decided to grant a subsidy of 10,000 yuan on each NEV purchase from March 2020 to December 2020.

The announcement came post the announcement from the city of Xiangtan, which offered 3,000 yuan to first 3,500 consumers on the purchase of local cars made in Geely.

China presently seems to be leading the role in supporting the domestic economic conditions. The Jiangxi provinces had already announced support for the producers of goods and materials, operating towards the prevention and control of the coronavirus as well as for the producers of daily goods in February 2020.

In the recent data readings for China, the Manufacturing PMI, Non-Manufacturing PMI, and Caixin Manufacturing PMI tumbled drastically for February 2020, and the market now anticipates even higher support from the government of China.

The anticipation of a stimulus from the government of China supported the iron ore prices as well, and the steelmaking raw material moved above its May contract average price.

To Know More, Do Read: Iron Ore Bounces: Prices Above Contract Average While MOI for May 2020 Remains the Highest

G7 Response on the Outbreak To Support the Market?

The recent response from the consortium of G7 is raising hope among market participants via providing expectations of further stimulus measures to counter the negative impact on the global economy from the virus outbreak.

The finance ministers and Central Banks chief of G7 held scheduled talks recently, in which the consortium discussed concerted stimulus to limit the economic impact of the coronavirus outbreak

World Bank Commits Support

The World Bank Group announced an initial package of up to USD 12 billion for providing immediate support to countries coping with the health and economic impacts from the coronavirus outbreak. The World Bank stated that the financing is intended to help members take appropriate measures, where possible, to abate COVID-19 impact.

The World Bank Group’s USD 12 billion support package consists of USD 8 million on a fast track basis, comprising of USD 2.7 billion from IBRD (new financing), USD 1.3 billion from IDA, and USD 6 billion from IFC.

Also, the financial package would provide grants at a lower interest rate for low-income countries from IDA while from IBRD for middle-income countries.

Market Response and Our View

While the market anticipates that the monetary ease alone would not support the commodity market, and it would require more than just bringing down the borrowing rates. At Kalkine, we believe that the accumulated support from various Governments, Central Banks, Supernational Organization, could help the global economies to recover, which in turn, could shape the commodity market well ahead.

However, there are many potential risks, such as the absence of medical treatment holds, which hold a high probability of exerting pressure on the global commodity frontier.

Also Read: Production Cut and Monetary Ease Speculations Propel Crude; Weak Demand Across Refineries Persist

Many miners across the globe such as SQM are already issuing warnings and notifying investors that the impact of COVID-19 could be deep ahead, on the other hand renowned investor Warren Buffet is suggesting not to buy and sell on the headlines.

In his latest interview with CNBC, Warren Buffet quoted that-

“The real question is: ‘Has the 10-year or 20-year outlook for American businesses changed in the last 24 or 48 hours?’”

And, in his annual investor letter, Warren Buffet Mentioned that-

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