Raw Material and Dollar Strength Lead to Sluggish Performance

[Asia Economy Reporter Song Hwajeong] The commodity market is showing signs of weakness due to the resurgence of the novel coronavirus infection (COVID-19) and the rebound of the dollar. While expectations for China's economic recovery may act as a factor limiting the decline, analysis suggests that if the dollar's strength continues, downward pressure on commodities could increase.

According to Kiwoom Securities on the 26th, the commodity market, including crude oil, gold, and non-ferrous metals, showed overall weakness this week. West Texas Intermediate (WTI) and Brent crude oil fell more than 2% and 3%, respectively, over the week. Sim Subin, a researcher at Kiwoom Securities, said, "Concerns over weak oil demand due to economic lockdowns caused by the resurgence of COVID-19 in Europe increased, and the dollar also strengthened, causing international oil prices to fall. However, the decline was limited as U.S. crude oil inventories continued to decrease."

Precious metals also showed weakness, with gold falling 3% and silver dropping more than 14%. Although safe-haven demand increased due to the spread of COVID-19 in Europe, the dollar index rose to around 94 points. Gold fell below $1,900 per troy ounce.

Non-ferrous metals such as copper and aluminum also declined due to the strong dollar trend. Concerns about the economy caused by the resurgence of COVID-19 in Europe and instability in the U.S. stock market strengthened risk-averse sentiment, which also contributed to the decline.

Next week, attention should be paid to the trend in new COVID-19 cases in Europe. Researcher Sim said, "In the case of international oil prices, concerns over a slowdown in oil demand are increasing due to the possibility of economic lockdowns in Europe caused by the resurgence of COVID-19, which is strengthening downward pressure. While OPEC+ (the Organization of the Petroleum Exporting Countries (OPEC) member countries and non-OPEC allies) oil-producing countries are mentioning supply adjustments and responses to falling oil prices, U.S. crude oil inventories continue to decrease, and the possibility of a full lockdown like in the first half of the year is low, which alleviates the downward pressure on oil prices. However, as movement restrictions may be strengthened due to the spread of COVID-19, prices could fall below $40 per barrel again," he explained.

The fact that the spread of COVID-19 is acting as a factor strengthening the dollar is also a reason to pay attention to the trend of COVID-19 spread in Europe. Researcher Sim said, "Previously, commodity prices generally rose as the dollar weakened, but if the dollar continues its rebound due to concerns about the Eurozone economy or euro weakness, downward pressure on commodity prices could increase somewhat next week."

Expectations for China's economic recovery are analyzed to act as a factor limiting the decline in commodity prices. Researcher Sim said, "The market consensus is that China's official and private manufacturing PMIs for September will exceed the previous month, so expectations for China's economic recovery will continue. Accordingly, commodities with a high demand share from China, such as non-ferrous metals, are expected to either slightly rebound or decline further after the indicator release," he predicted.