Crude oil and gold prices may decline if a half-hearted stimulus effort from the ECB fails to boost risk appetite and reignite anti-fiat demand.
Commodity prices are treading water in overnight trade as all eyes turn to the European Central Bank monetary policy announcementamid widespread speculation about a 25bps interest rate cut to address the region’s deepening recession. Taken together, the Eurozone is the world’s second-largest economy and currently the sickliest of the major engines of global output, seemingly making the introduction of added stimulus there a supportive development for risk appetite.
A reduction in the benchmark lending rate alone without an accompanying QE-like non-standard stimulative effort may fail to impress investors however. The market rate to borrow Euros overnight has averaged around 0.1 percent over the past 12 months. That means cutting the ECB benchmark lending rate from 0.75 to 0.5 percent would be essentially moot in terms of lowering regional borrowing costs. Meanwhile, a Bloomberg index tracking Eurozone financial conditions has shown slow deterioration since late January, underscoring the inability of low rates by themselves to secure a supportive funding environment.
With this in mind, cycle-sensitive crude oil and copper prices may not find lasting support even if the ECB opts to deliver a rate cut. Gold and silver may likewise face selling pressure in the absence of more significant liquidity-expanding program that is at least introduced into the near-term outlook if not implemented outright. Such a scenario would do little to advance fiat dilution concerns, undermining demand for assets seen as an alternative store of value.
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