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Iron Ore Prices Slumped -6% on Supply Growth and Fed's Rate Hike Print E-mail
ONG Focus | Insights | Written by Oil N' Gold | Thu May 19 16 22:09 ET

Commodities generally weakened, led by metals amidst rising US dollar and concerns over moderation of the global growth outlook as the Fed hikes interest rates in summer. Metal Bulletin's iron ore index plunged almost -6% to close at US$53.47/tone, the lowest level since March 15. Besides, US rate hike speculations, iron ore prices were dampened by rising supply. Precious metals fell across the board. Gold dropped -1.53%, extending the weakness for a second straight day to 1254.2. Silver plunged -3.74% as hurt by its industrial metal characteristics. For PGMs, platinum dropped -2.83% while palladium was down -3.65%. Energy prices also softened a tad with the front-month WTI crude contract and the Brent contract losing -0.06% and -0.25% respectively.

Rio Tinto CEO Andrew Harding indicated that some Chinese operators have returned to the market following the recent price recovery. Meanwhile, BHP Billiton marketing vice-president Vicky Binns warned that the recent price recovery was likely no more than a "temporary rally". He added that, although China's steel consumption should continue to grow into the next decade, demand for iron ore would decline as the country turns to using more scrap in its steel production. These comments have helped cap the strength of the metal which has accumulated +22% of gains since the beginning of the year.

Market sentiment continued to adjust following a more-hawkish-than-expected FOMC minutes for April. New York president William Dudley (voter; dove) noted in a speech that "a tightening in the summer, the June-July time frame, is a reasonable expectation" if his economic forecast - an economy that "grows above trend, continues to put downward pressure on the unemployment rate and leads to further tightening in labor markets", and policymakers and market participants are "more confident over time that inflation is going to return to our 2% objective"- is on track. Regarding heightening speculations of a rate hike in summer, Dudley suggested that he was "actually quite pleased" to see that. He also admitted that the uncertainty of Brexit referendum (to be held on June 13, after FOMC meeting) would complicate the Fed's monetary decision in June.

In ECB's minutes for the April 21 meeting, policymakers showed concern that measured inflation expectations had not picked up although the commodity market has stabilized. Yet, they remained cautiously optimistic over the effectiveness of the stimulus measures implemented so far. Members also generally agreed that "there was a need to counter the perception that monetary policy could no longer contribute to a return of inflation", in response to some Eurozone governments' recent criticisms over ECB's policy decisions. The minutes also noted that "it was viewed as important to reaffirm collectively the independence of the ECB in the pursuit of its mandate".

On the dataflow, headline CPI in Canada probably eased to +0.4% m/m in April from +0.6% a month ago. BOC's core CPI measure might also show moderation to +0.2% m/m from +0.7% in March. Canada's retail sales probably contracted -0.7% m/m in March, after gaining +0.4% a month ago. Excluding auto, the figure might have declined -0.4%, following a +0.2% growth in February. In the US, existing home sales probably added +1.13% to 5.39M in April.