Commodities continued to witness mixed trade as market players remained non-committal ahead of US Presidential elections on November 3.
The biggest concern for market players right now is whether US policymakers will be able to reach a deal on fiscal stimulus before the elections. And if not, then how the outcome of elections will impact the deal.
Democrats and Republicans are at loggerheads over size and scope of the bill with Democrats supporting bigger stimulus package. Hence, the general expectation is that if a stimulus deal happens post-election and Democrat nominee wins, he may approve a bigger package.
The US economic recovery is slowing down as is evident from mixed economic data while rising virus cases continue to pose challenges. Hence, stimulus deal will help improve the outlook for the US economy and boost commodities at large. A bigger stimulus deal may further improve risk sentiment.
While market focus is on stimulus deal, the new regime could impact other policy actions affecting the outlook for the US economy and impact commodities directly or indirectly.
US-China tensions have been a constant cause of worry for commodity traders as trade talks have stalled post a partial trade deal in January this year. President Trump has been tightening the noose against China blaming it for the virus spread and challenging its dominance in the South China Sea region. A win by President Trump means the US may continue to pressurize China but we need to see if Joe Biden will maintain the status quo or soften its stance. If US-China tensions ease, it may turn out positive for commodities at large.
Both Biden and Trump have emphasized the need for increased spending on infrastructure but there is not much clarity on how it will be financed. If we see any major allocation for this sector it may also boost the outlook for the US economy as well as commodities.
The two Presidential candidates however diverge a lot on issues like tax, climate policy etc. While President Trump has lowered tax rates and may maintain the status quo, Joe Biden wants to put the top income tax bracket rate back to the Obama-era causing the rich to pay more.
Individually, Joe Biden has assured shale producers that he wouldn’t ban fracking if elected. However, he has been an ardent supporter of clear energy. Any policy change towards renewable energy may not bode well for the oil and gas sector.
Overall, uncertainty relating to US elections has pushed market players to the sidelines however there is more at stake than the stimulus deal and volatility is likely to remain in place.
(Ravindra Rao is the VP – Head Commodity Research at Kotak Securities.)
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