December 2009

Gold Marks its Biggest Plunge Since December 4th Reversal as Sentiment Stumbles, Dollar Rallies

North American Commodity Update

Commodities – Energy

Crude Recovery Stalls as Dollar Triggers Another Rally

Crude Oil (LS NYMEX) -  $72.78  //  $0.12 //  0.17%

If it weren’t for the momentum supplied through a mid-week reversal and yesterday’s sharp drop in inventory figures; crude prices would likely be much lower on the day. However, through the end of the US session, the benchmark commodity was little changed after a relatively volatile day. The primary driver for the session was underlying market sentiment. The winds of risk aversion were once again kicking up with global equity benchmarks sliding approximately one percent and gold tumbling over three percent at one point during the day. For oil prices, the dollar’s surge to a three-month high against its counterpart euro has played the dual role of risk barometer and a counter to the commodity (as the greenback is its principal pricing instrument). Can this plunge in risk appetite last? Not likely. We are heading into holiday trading conditions, which are prone to high volatility due to thin liquidity conditions; but the same conditions tend to dampen trend development. Another consideration is the rollover in the active futures contract. The January 2010 contract expires next Monday; but due to liquidity concerns, traders are already rolling out to the next contract. Typically, this position maintenance does lead to unusual price action; but it oftentimes also prevents trends.

Aside from heightened volatility, fundamental currents will retain their influence over prominent trends. Supply-and-demand fundamentals are taking a greater influence over the energy market after the correction over the past two months reduced a considerable portion of the speculative premium that had built up behind prices. There is still a tremendous glut of crude and fuel holdings in the market; but consumption and production reports are starting to change the outlook. This past week, the US Department of Energy reported a sharp 3.689 million barrel drop in oil inventories through the week ending December 11th.  This pulled total supplies to their lowest level since January 9th. Furthermore, total fuel consumption through the period jumped the most in nearly five year (6.7 percent) to a four-month high 19.6 million barrels per day. Yet, this is just a week’s worth of data. Current levels of supply are still well above the average for the year and demand is still weighed by the lingering influence of the worst recession in recent history. Next week, OPEC will have a chance to impact price action when members rule on production limits. However, the reported comfort with prices between $70 and $80 per barrel likely precludes any changes.

Commodities – Metals

Gold Marks its Biggest Plunge Since December 4th Reversal as Sentiment Stumbles, Dollar Rallies

Spot Gold  -  $1,104.70  //  -$33.20 //  -2.92%

With risk appetite on the retreat and the US dollar surging to a three-month high, gold would itself plunge to a month low. The precious metal, at its lowest point, was down nearly 3.5 percent for the day. This was the biggest, one-day decline since the December 4th drop off that finally collapsed the commodity’s steady bull trend. The extension of the markets biggest reversal since the first quarter can likely find its roots in profit taking and general position unwinding heading into the end of the year. Investors have played the dominant role in establishing ‘stability’ for the financial markets by returning sidelined capital back into speculative assets. Gold was one of the most desperately sought after securities in this shift as its tangibility and penchant for sharp capital gains appealed to market participants that wanted to recoup wealth lost during the 2008 market collapse but were also still cautious of the precarious of state of the markets so soon after a major bear market. Now, heading into the end of the year, we have waded through two months of congestion. This undermines confidence in every asset; but for one trading at record highs, it is particularly harrowing. Therefore, a speculative correction adds another dimension to year-end position squaring. However, ahead to 2010, true fundamentals will once again come into play. Demand for the precious metal will have to come from market players (investors, traders, central banks, etc) that are very confident in the potential for appreciation. There are fewer and fewer parties that can afford the asset at such elevated levels. On the other hand, the metal’s role as a dollar and inflation hedge can add to the buoyancy. Yesterday, the US consumer-level inflation report jumped back to a 1.8 percent annual pace to highlight the side effects of extremely loose monetary policy – a matter complicated by the Fed’s vow to hold rates at an “exceptionally low” level. In turn, low rates also diminishes the appeal of the dollar. The FOMC holds gold’s future in its hands.

Spot Silver  -  $17.24 //  -$0.47  //  -2.63%

Silver dropped for the first time in four days, spurred by the remarkable plunge in gold and meaningful rally in the US dollar. For drive, the same fundamentals that apply to the yellow metal apply here. However, there is a difference in severity of the move and overall trend that exposes how oversold the more dear commodity was at record highs. Demand for an a physical asset when financial markets are looking shaking increases the appeal of this more affordable asset. For market activity, aggregate volume continues to diminish as the end of the holiday period approaches. Open interest is similarly contracting as speculative interest drops off with the market’s correction.

Discuss gold and oil trading with other traders in the DailyFX Forum

Written by John Kicklighter, Strategist
Questions or Comments about this article? Send them to jkicklighter@dailyfx.com

Stocks in Asia/Pacific Mixed on Interest Rates Expectation; HKMA Sees Risk For ‘Sharp Correction’ in Asset Prices

Asia Session Key Developments

• Hong Kong Jobless Rate  Falls to 5.1%
• Japan’s Leading Index Rises for 8^th Consecutive Month
• New Zealand’s Business Confidence Rises to 10-Year High

Asian stocks were mixed on Thursday for a second consecutive day amid expectations that the U.S. central bank will raise interest rates in 2010 subsequent to Hong Kong’s central bank stating that the city is at risk of “sharp corrections” in asset prices. The Hong Kong Monetary Authority said that the recent rally in global equities has been fueled by a rise in risk appetite, and saw a risk for a reversal, which could bring “volatilities in the real economy.” At the same time, the central bank held its benchmark interest rate at the record-low of 0.50%, but went onto say that the expansion in global policy “may heighten the risks of asset-price and consumer-price inflation through the expectation and credit channels.” Investors also adding onto mix trading in Asia/pacific as traders looked to lock in profits after a regulatory official said bad loans pose a long-term risk for the region yesterday. In Japan, the new composite index of business cycle indicators for October was revised higher at 89.4, while the coincident index was revised at 94.3. Meanwhile, Hong Kong’s unemployment rate for November declined to 5.1% from 5.2% the month prior, falling in line with expectations, marking the lowest level since February.

Nikkei 225                          10,163.80

The Japanese equity markets plunged on Thursday, leading the Nikkei 225 to shed 13.61 points (0.13%) and close at 10,163.80. Half of the ten components traded lower on the day, with utilities falling 1.35% to lead the decline, while oil & gas added 3.61% during the session. Shares of Sumitomo Metal Mining advance 1.66% on the back of higher metal prices, while Inpex rallied 3.64% as oil halted its longest slump since July 2001. Moreover, Toyota Motor was unchanged on the day, with Mazda Motor adding 2.46% as the two automakers will work together on technology for hybrid vehicles, while Advantest Corp gained 1.63% as the Japanese Yen continued to lose ground against the U.S. dollar.

Hang Seng                        21,347.63

Hong Kong shares closed lower on Wednesday for a third successive day, with all but four stocks dropping on the 42-member index,  leading the Hang Seng to shed 264.11 points (1.22%) and end the trade 21,347.63 as all nine components traded lower for the second day. Shares of Esprit, the largest Hong Kong – traded clothier, slipped 3.00% as the company agreed to pay HK$3.88 billion to buy the 51% of the textile venture with China Resources, while New World Development decline 3.26% as the Hong Kong Monetary Authority held a cautious outlook for the real economy. At the same time, China Overseas Land & Investment shed 1.89% as the central bank sees a risk for a “sharp correction” in asset prices, while Cnooc tipped 0.50% higher on the day following the rebound in crude oil prices.

S&P/ASX 200 Index           4,670.30

Stocks in Australia traded to the upside on Thursday, leading the S&P/ASX 200 to gain 8.40 points (0.18%) and close at 4,670.30. Six of the ten components traded higher on the day, with technology advancing 1.89%, while consumer services slipped 0.37% to taper the rally. Shares of BHP Billiton, the world’s largest mining company pushed 0.88% higher amid copper prices rising the most in a month during the previous day, while Asciano slumped 1.75% as Queensland Rail, Australia’s biggest coal transporter, beat Asciano to win A$2 billion of contracts from Xstrata Plc. Meanwhile, Axa Asia Pacific Holdings soared 12.74% due to the A$13.3 billion bid by National Australia Bank to buy Axa Asia Pacific Holdings, while ING Industrial Fund increased 5.56% as JPMorgan Chase & Co. raised the company’s stock rating from “neutral” to “overweight.”

Notable Asian Session Event Risk / Economic Releases

Crude Accelerates its Reversal on a Sharp Drop in Inventories, Jump in Consumption

North American Commodity Update

Commodities – Energy

Crude Accelerates its Reversal on a Sharp Drop in Inventories, Jump in Consumption

Crude Oil (LS NYMEX) -  $72.83  //  $2.14 //  3.03%

A rebound from the worst bear trend in eight years is bound to have some level of initial volatility and momentum; but oil’s rally through Wednesday’s US session was far more aggressive than warranted from a mere rebound. The active crude contract rallied 2.79 percent through the day for its most aggressive advance in a month – encouraged by a high impact inventory report. After the API reported a surprise 924,000-barrel increase in crude inventories Tuesday afternoon; the consensus forecast for the US Department of Energy’s figures for the same period seemed unjustifiable bearish. However, the 2.0 million barrel drop in stockpiles forecasted proved a better bearing than the industry group’s numbers. According to the government, oil inventories for the week ending December 11th tumbled 3.689 million barrels. This was a slightly smaller reduction than the previous week’s reading; but together, these two contractions represented the worst back-to-back since the September 4th and 11th reports. Historically, last week’s slump pulled total supplies to 332.4 million barrels – the lowest overall level since January 9th. Furthermore, imports of the commodity slowed to a level not seen since September of last year.  The only setback on the supply side was the fact that Cushing, Oklahoma-area stores actually rose for the seventh consecutive week (the NYMEX’s benchmark contract is based on the West-Texas Intermediate grade that is stored in this region).

However, in the broader scheme of things, supply is still well above the historical average; and to truly close the gap on fundamentals, demand will have to sop up the overhang and support the output levels that major energy producers have become accustomed to. On this front, the DoE’s weekly data was further supportive of the outlook. According to the report, total fuel consumption through the week jumped 6.7 percent to 19.6 million barrels per day. This was the biggest increase in demand in more than five years and lifted the overall level to its highest since August. Another highlight was the 14 percent surge in distillate demand – the most since February of 2008 to an eight month high. Outside the influence of inventory report, macro and political influences were also in play. Iran – already facing sanctions for its nuclear ambitions – riled international policy makers and traders when they successfully tested a medium-range missile. For long-term, underlying demand, the economic docket would raise the bar on projected consumption with strong readings from European manufacturing activity figures, UK employment data and US housing data. Now that we are back within the comfort zone that some OPEC members have defined (between $70 and $80), we will see where the market will go from here.

Commodities – Metals

Gold Advances as Dollar Stalls, Inflation Advances

Spot Gold  -  $1,137.90  //  $12.70 //  1.13%

Considering the slow chop that has developed after the beginning of the month reversal, it should not come as a surprise that gold’s advance through Wednesday was the largest in two weeks. However, the 1.1 percent rally was hardly the makings of a quick return to record highs for investors’ favorite trading vehicle. The precious metal is still over 7 percent off its high set on December 3rd; and it may take a considerable, fundamental event (or series of events) to polish the appeal of the already expensive commodity. For fundamentals today though, the advance was well founded. The primary catalyst for this market the past few weeks, the dollar, was offering little in the way of influence as the dollar stalled in its push to two-month highs. Against the euro, the greenback has found a significant hurdle in the 1.45 level. Moving down the line, risk appetite was an earlier supporter for the metal. Early strength in the European equities market would translate into a rally for the Dow on the open; but once again, 10,500 proved too significant a level to overcome on such staid sentiment trends. The real drive would end up coming from inflation. The US consumer-level inflation indicator reported the first annual growth in prices in nine months; and the 1.8 percent pace was certainly reason for concern when it comes to fears of hyperinflation developing from the extremely loose policies that governments and central banks are maintaining.

Spot Silver  -  $17.71 //  $0.29 //  1.67%

Silver advanced for the third consecutive session. Ultimate, this is the best trend for the more placid metal since the aggressive rally through November 18th. For fundamentals, demand for gold and the tempered dollar offered primary encouragement for bulls. However, in this tentative upturn; we have to defer to the depressed levels of aggregate volatility and open interest to really garner a sense of strength when it comes to bullish intentions and conviction.

Discuss gold and oil trading with other traders in the DailyFX Forum

Written by John Kicklighter, Strategist
Questions or Comments about this article? Send them to jkicklighter@dailyfx.com

U.S. Equities Erase Morning Gains, Close Mixed

U.S. Session Key Developments

•    Stocks Gain in Morning on Strong Economic Data But Falter in Afternoon
•    Crude Oil and Metals Extend Yesterday’s Gains
•    Federal Reserve Releases Rate Decision and Accompanying Statement

U.S. stocks posted significant gains in the morning, but faltered to a mixed close after the FOMC rate decision and statement were released.  The S&P 500 and Nasdaq traded slightly to the upside, while the Dow closed slightly in the red.  Driving stocks higher in the morning were government reports that home building and consumer prices increased, signalling to investors that the economic recovery is strengthening.  This improved economic sentiment helped crude oil prices rise nearly 3 percent to $72.76, while gold and silver added 1.4 percent and 1.6 percent respectively.  The commodity prices were also boosted by a weakening dollar.  The U.S. Dollar Index failed to hold above 77 and the currency closed the day lower against all of its major crosses.  Stocks failed to hold morning gains after the FOMC rate decision which held the U.S. benchmark lending rate in a range of 0.00-0.25 percent.  The Fed repeated its pledge to keep interest rates “exceptionally low” for an “extended period.”  The Fed reiterated that the economy is improving yet remains weak, concerning investors that the central bank may wait too long to tighten monetary controls.  As a result, long-term Treasurys continued their recent trend of falling prices and increasing yields.  The 10-year yield rose to 3.59 percent and the 30-year yield sits at 4.52 percent.

DJIA 30                      10,441.12                     -10.88                      -0.10%
The Dow Jones Industrial Average was the lone index to fall today despite only 13 of its 30 stocks closing in the red.  Intel Corp., the world’s leading computer chipmaker, fell over 2 percent after the Federal Trade Commission accused the company of illegally using its dominant market position to stifle competition.  The oil & gas sector of the index closed lower as Exxon Mobil fell over 1 percent after yesterday’s announcement that it purchased XTO Energy.  The worst performing sector was telecommunications, dropping over 1.6 percent.

S&P 500                     1,109.18                         +1.25                       +0.11%
The broader S&P500 index finished slightly higher as the basic materials sector gained 1.21 percent on the trading day.  Gold and copper miner Freeport McMahon and aluminum titan Alcoa each gained at least 1.5 percent on a significant run-up in commodity prices today.  The next best performing sector were the financials, led by at least 3.8 percent gains for Charles Schwab and Prudential Financial.  Charles Schwab’s stock was upgraded by Deutsche Bank and Morgan Stanley, while Prudential announced a $1.15 billion gain from the sale of its stake in a Wells Fargo brokerage unit.

NASDAQ                    2,206.91                      +5.86                     +0.27%
The Nasdaq index was the best performer of the U.S. indices, as technology stocks gained approximately half of one percent.  Adobe gained over 4 percent after announcing that its fourth quarter earnings were 39 cents per share compared to the 37 cents expected.  Broadcom was another big winner of the index, gaining 4.5 percent after fraud charges against the company’s co-founder and former CFO were dismissed.

Written by James Russell, CFDTrading Research
Please send any comments about this report to JRussell@fxcm.com

Stocks in Asia/Pacific Mixed on Growth Concerns; Japan May Delay Release of Annual Tax Guidelines

Asia Session Key Developments

• Copper Falls for a Fifth Day in London
• Australian Economy Expands 0.2% in the Third Quarter
• Japan’s Government May Delay Annual Tax Release

Asian stocks were mixed on Wednesday as lenders in China weakened after a regulatory official said bad loans pose a long-term risk for the region, while banks in Japan climbed higher on the day amid speculation that they will have at least a decade to implement stricter capital rules. In Australia, third quarter gross domestic product accelerated for a third successive quarter on the back of government spending on roads, ports and schools, with the growth rate expanding at an annual rate of 0.5% from the three-months  through June, the Bureau of Statistics said in Sydney today. Meanwhile, Japan machine tool orders plunged at an annualized pace of 8.4% in September after tumbling 8.6% in the month prior, marking the 18^th consecutive monthly decline, while Japan Finance Minister Fujii said the government may delay the release of its annual tax guidelines to next week and ensured that the delay would not interfere with the release of the budget.

Nikkei 225                          10,177.41

The Japanese equity markets soared on Wednesday after trading lower for two straight days, leading the Nikkei 225 to climb 93.93 points (0.93%) and close at 10,177.41. Nine of the ten components traded higher on the day, with financials rising 3.26% to lead the advance, while telecommunications tipped over 0.04% during the session. Shares of Mizuho Financial Group surged 15.19% as the Nikkei newspaper said global regulators will delay enforcement of new capital adequacy rules, while Sumitomo Mitsui Financial Group rallied 14.34% as Deutsche Bank raised its outlook for the banking sector to “market weigh” from “underweight.” At the same time, Nippon Express slipped 2.54% as BofA Merrill Lynch lowered its rating on the firm to “underperform” from “neutral,” while Japan Airlines advanced 3.00% as the firm moves closer to winning an approval to cut its pension for retirees.

Hang Seng                        21,611.74

Hong Kong shares closed lower on Tuesday for a second consecutive day, leading the benchmark equity index to shed 202.18 points (0.93%) and end the trade at 21,611.74 as all nine components traded lower on the day. Shares of China Construction Bank pushed 2.09% lower as China may have 9.6 trillion yuan ($1.4 trillion) of new loans this year, rising 30% from 20008, while Aluminum Corporation of China slid 1.93% on the back of lower commodity prices. Moreover, China Petroleum & Chemical tipped 1.90% lower as China has no plan to change its fuel – pricing mechanism over the near future, while Cosco Pacific gave back 1.87% as the company issued a profit warning, announcing that it will post a full-year net loss for 2009.

S&P/ASX 200 Index           4,661.90

Stocks in Australia halted its three day advance, leading the S&P/ASX 200 to slip 11.60 points (0.25%) and close at 4,661.90. Seven of the ten components traded lower on the day, with industrials shedding 0.87%, while telecommunications gained 1.06% to taper the decline. Shares of CSR and News Corp gained 0.87% and 2.74%, respectively as Deutsche Bank raised its ratings on both firms from “hold” to “buy”, while Iluka Resources advanced 1.75% as ABN Amro Holdings increased its rating on the stoke to “hold” from “sell.” At the same time, Santos, Australia’s third-largest oil and gas producer, gained 1.91% as crude oil rose in New York yesterday, snapping the longest decline since 2001, while Perpetual lost 3.96% as Credit Suisse Group downgraded the Australian fund manager to “underperform” from “neutral.”

Notable Asian Session Event Risk / Economic Releases

U.S. Equities Fall From Highs Despite Positive Economic News

U.S. Session Key Developments

•    All Eyes on FOMC Rate Decision Tomorrow
•    Financials Fall as Citigroup and Wells Fargo Discuss TARP Payback Plans
•    Crude Oil Halts Nine Day Losing Streak

U.S. stocks fell for the first time in a week, led by weakness in the financial sector as Citigroup and Wells Fargo discuss their plans to pay back the TARP money that the institutions received from the U.S. government.  Investors sold off equities despite industrial production and capacity utilization beating their estimates.  With the economy continuing to strengthen from the worst recession since World War II, all eyes are on the Federal Reserve’s statements tomorrow regarding the FOMC rate decision at 2:15 ET.  Many investors expect the tone to be more positive than the last meeting in November, and the central bank will likely continue their discussion regarding an exit strategy from its asset purchasing programs.  Many see rate hikes as a definite possibility at some point next year, although it is unlikely that such a maneuver would happen during the first six months.  As a result, U.S. Treasury yields increased today as well as the U.S. dollar, which peaked at its strongest level against the euro in two months.  Despite the rise in the greenback, commodities traded higher with crude oil closing back above $70 a barrel.  Prior to today’s gain, crude oil had embarked on a nine day slide, falling over 10 percent in the past two weeks.  Looking ahead to tomorrow, the FOMC decision will be the key market driver, but consumer prices and housing data could also impact the equity markets.

DJIA 30                      10,452.00                   -49.05               -0.47%
The Dow Jones Industrial Average fell just under half a percent today as its telecommunications, financials, and basic materials components fell over 1 percent each.  Bank of America and JPMorgan dropped over 2 percent each, while telecom giants AT&T and Verizon fell at least 1.6 percent each.  Only eight of the Dow’s 30 stocks posted gains during today’s session, led by Disney which added 1.1 percent as its newest project, “The Princess and the Frog”, became the top grossing film in the U.S. and Canada this past weekend.

S&P 500                     1,107.93                        -6.18                     -0.55%
The broader S&P500 index dropped as each of its components fell with the exception of energy.  Financial stocks were the worst performer, dropping 1.6 percent, as Citigroup dicussed its plan to raise $20.5 billion of equity and debt to pay back the bailout money from the U.S. government.  JPMorgan Chase fell 2.2 percent after revelaing that its net credit-card losses rose to 8.81 percent in November from 8.02 percent the month prior.

NASDAQ                    2,201.05                      -11.05                    -0.50%
The Nasdaq index fell half a percent today as tech stocks closed today’s session lower.  The six most heavily weighted tech stocks in the index all dropped lower, led by at least a 1 percent decline for Apple and Cisco.  Adobe Systems, however, added 1.6 percent after reporting fourth-quarter profit that exceeded analysts’ estimates.

Written by James Russell, CFDTrading Research
Please send any comments about this report to JRussell@fxcm.com

Dow Consolidation Increases Breakout Potential

As is often the case in Elliott, the picture is becoming much clearer as the rally has matured and nears its end.  The advance from the March low is a complex W-X-Y (a-b-c-x-a-b-c) rally.  Notice the broadening formation since August.  Broadening patterns almost always signal tops (called ending diagonals in Elliott terminology).  Levels to watch for resistance are 10365 and 10495 (100% extension).

The Dow ended three days of consecutive gains yesterday as it held to its recent range. The Blue chip index has found staunch resistance at 10,500 which could set it up for a retracement today back toward 10,000 and trend line support. Upside potential may be limited with resistance looming at 10,581-61.8% Fibo of 13,136-6,469. Traders should watch for a potential breakout with a breach of either bound of the current range (10,200-10,500).

The S&P is in a similar situation to the Dow.  The count from the March low is the same but the recent surge that propelled the Dow to a new high has yet to do the same for the S&P.  A broadening formation from the August low is evident here as well, which again does warn of a top.  A new high exposes 1110.30 (top of gap from October 2008 in December contract), then 1134 and 1159 (100% extension) in the index.

The S&P 500 continues to consolidate after failing to break above resistance at 1,120- 50.0% Fibo of 1,576- 666 which could foretell of a breakout. A test of trendline support near 1,080 remains a strong possibility the longer the broader index remains below resistance. A break above the Fibo level exposes 1,150.

The NASDAQ pattern is the same as the S&P pattern in that the index has yet to make a new high.  The more volatile index also broke a support line and dropped below its October low (red line) – something that the other indexes failed to do.  Clearly, the technical situation for bulls is deteriorating.  A new high would expose 2341 (100% extension).

The NASDAQ has started to form an ascending triangle pattern which is a sign for a potential bullish breakout. However, if trendline resistance holds then we could see the continuation of the longer developing triangle which equals more concentrated price action with the possibility of another test of support near 2,095.

Asia/Pacific Stocks Mixed as Fitch Holds Cautious Outlook for China; RBA Sees Increased Flexibility for Future Policy

Asia Session Key Developments

• Copper Advances for a Third Day
• RBA Says Rate Hike Provides More “Flexibility” for Future Policy
• Fitch Ratings Says Casts Cautious Outlook for New Lending in China

The Asian equity markets slipped lower for a second day as shipping lines stumble on bulk cargo rate, while market participants speculate China’s government will take steps to curb property speculation in order to stem the risk for an asset bubble. Moreover, Charlene Chu, a senior director and the head of China bank ratings at Fitch held a cautious outlook for the region and said “credit growth of this magnitude inevitably places a strain on banks’ internal risk management, and raises concerns about a future deterioration in loan quality,” and expects new loans outstanding to reach $1.4T by the end of the year, which would make up approximately 29% of GDP. Meanwhile, the Reserve Bank of Australia’s meeting minutes said that the risks for the economy were “finely balance” and argued that the “adjustment would not be intended to slow demand compared with the current forecast path, but aimed simply at keeping the stance of policy appropriate for improving economic conditions.” Moreover, the central bank said that the recent developments “suggested a rise in GDP for the quarter,” and went onto say that the rate hike “would best reflect the circumstances facing the economy over the period ahead.”

Nikkei 225                          10,083.48

The Japanese equity markets pushed lower on Tuesday for a second straight day, leading the Nikkei 225 to slip 22.20 points (0.22%) and close at 10,083.48. Eight of the ten components tipped lower on the day, with oil & gas tumbling 1.33% to lead the decline, while financials added 0.94%. Shares of Japan Airlines gained 2.04% as the firm announced 75% of its retirees agreed to the pension cut, while Fuji Heavy Industries advanced 2.83% as the carmaker plans to raise capacity at two of its major key plans in the U.S. and Japan to meet rising demands. Moreover, Mitsui O.S.K. Lines slipped 1.5% as the Baltic Dry Index, which gauges the cost of shipping commodities, weakened for the sixth day, while NEC Corp added 2.26% after signing an agreement with Renesas Technology to integrate their semiconductor business and become the world’s third-largest producer by sales.

Hang Seng                        21,813.92

Hong Kong shares closed lower on Tuesday, leading the benchmark equity index to shed 271.83 points (1.23%) and end the trade at 21,813.92 as 6 of the 9 components traded lower on the day. Shares of China Construction Bank slipped 2.19% as the institution announced it will sell 20 billion yuan of 15-year subordinated bonds starting on December 18^th, while Industrial & Commercial Bank of China pushed 1.39% lower as Fitch Ratings forecasts new loans in China to grow at a slower pace in 2010. Meanwhile, Cheung Kong Holdings tipped 1.28% lower as Singapore’s private home sales slowed for a fourth  consecutive month following a rebound in property prices, while Cosco Pacific fell 1.17% as China Cosco Holdings expects to post a net loss for the year ending December 31 and plans to levy an “emergency revenue charge” on Asia – U.S. container shipments from January 15^th.

S&P/ASX 200 Index           4,673.50

Stocks in Australia traded higher on Tuesday for a third straight day on the back of higher industrial metal prices, leading the S&P/ASX 200 to rise 19.50 points (0.42%) and close at 4,673.50. Six of the ten components traded higher on the day, with basic materials adding 1.07%, while telecommunications slid 1.07% to taper the advance. Shares of Caltex Australia surged 4.20% as Australia’s weekly unleaded gasoline prices for December 13^th climbed to A$1.222 from A$1.218 the week prior, while Onesteel added 3.28% as the company was raised from “neutral” to “outperform” by Macquarie Research. At the same time, SP AusNet climbed 2.41% as Fitch Ratings affirmed the group’s long-term foreign currency issuer default rating at ‘BBB+’, and senior unsecured ratings at ‘A-‘, while Hill Industries pushed 2.06% higher amid the company along with Rovi signing an IPG patent licensing agreement.

Notable Asian Session Event Risk / Economic Releases

Crude Oil, Metals Face Dense US Economic Calendar

Commodities – Energy

Crude Oil Volatility Likely on Dense Economic Calendar

Crude Oil (WTI)       $69.49       -$0.02        -0.03%
Crude prices look to have broken lower out a corrective rising channel to meet minor support at $69.46. A break lower will open the door for a decline to $68.96. Near-term resistance lines up at $69.59, the broken channel bottom. Beyond that, the bulls face a significant barrier at the $70 level. The economic calendar is packed with fundamental event risk: producer prices are set to advance, which could weigh on prices by feeding gains in the US Dollar as traders continue to re-price their outlook for the Fed monetary policy; however, improving industrial production and NAHB Housing Market Index figures may prove supportive. Inventory figures from the American Petroleum Institute are also on tap.

Commodities – Metals

Gold Positioned to Extend Losses But Silver May Diverge

Gold       $1118.85        -$7.85       -0.70%
Prices continue to grind their way through support in the $1111.20-1123.38 congestion region, with a push below that clearing the way for a test of $1100. A falling channel is guiding the move lower, with prices now on their way down having tested the formation’s upper boundary. The spread between March 2010 and December 2010 90-day fed funds futures has retained a strong inverse correlation with gold prices, hinting that the outlook for US interest rates next year remains the key catalyst from the fundamental side of things. This means the upcoming PPI release is likely to be of particular significance, with an upside surprise offering continued impetus for bearish momentum.

Silver       $17.23       -$0.16       -0.89%
Silver is testing support at $17.02, but positive RSI divergence hints that an upswing may be ahead before the bears can regain momentum. Initial resistance is seen at $17.76, while a break lower will open the door for a decline to $16.74. Fundamentally, the landscape is much the same as that of gold, with the US rates outlook being of primary importance.

Speculative Interests Giving Way to Fundamentals as Crude Oil Extends its Record Breakout Plunge

North American Commodity Update

Commodities – Energy

Speculative Interests Giving Way to Fundamentals as Crude Oil Extends its Record Breakout Plunge

Crude Oil (LS NYMEX) -  $69.68  //  -$0.19 //  -0.27%

Bearish progress has eased up for the oil market; but the trend is growing more prominent with each active trading day. US crude futures traded on the NYMEX closed their ninth consecutive bearish session to mark the worst trend since July 2001 and a two-and-a-half month low. The relationship between pace and bearing in the energy benchmark is a reflection of speculative interests versus fundamentals. Investor interest was the primary source of strength for the market through the rally that drove prices from $65 per barrel up to $82. Through the early morning trading hours, interest among traders was under pressure on the initial follow through on Friday’s US dollar rally (this benchmark currency is also the market’s favored safe haven). Adding to the selling pressure, last week’s COT report revealed net speculative interest in oil fell 11 percent to a two-month low 67,817 contracts. However, optimism would perk up later after Dubai received $10 billion in assistance from Abu Dhabi to prevent a default in the face of immediate dues. This is certainly not a permanent solution to the potential financial implosion; but it nevertheless prevents aggressive selling through the immediate future.

While risk appetite oscillates from euphoric, to panicked and back to neutral; fundamentals continue to develop in the background. According to Deputy Prime Minister Igor Sechin, Russia (the world’s largest energy producer) increased crude exports 1.8 percent year-over-year to 247.4 million. In the US, the average price per gallon for regular gas fell 3.5 cents to $2.599 per gallon in the week through today, according to a government report. Macro data lowered expectations for demand even further. While the Japanese Tankan confidence survey for the 4Q showed measured improvement; there is still an overwhelming forecast for the health of the business sector to continue cooling and expectations for investment are suffering for it. In the Euro Zone, industrial production through October reportedly contracted for the first time in six months – stymieing expectations for a steady recovery. Tomorrow, industrial production figures from the US will provide a measure of demand for the world’s largest energy consumer. Perhaps, if output maintains its unfavorable pace, OPEC will be encouraged to pursue productions cuts. While officials from most members have suggested intentions to maintain current levels; there has frequently been quoted a target of $70-$80/barrel that has been labeled fair. We are now at the bottom of that range.

Commodities – Metals

Gold Edges Higher as the Dollar Eases Back

Spot Gold  -  $1,124.00  //  $8.60 //  0.77%

Gold retraced some of the losses suffered through Friday; but the advance was far from a reversal of the trend from the past two weeks. The strength that was present however can be attributed to underlying investor sentiment that was evident in equities, fixed income and FX along with commodities. The reserved advance through the morning was predominantly a response to the temporary support offered Dubai World. United Arab Emirate partner Abu Dhabi defused the immediate concern of a major debt payment due today by extending the state-owned group $10 billion in funds. Though while this may cover immediate obligations, loan restructuring and debts outstanding will not completely alleviate the financial threat this region poses. Market participants realized the limited scope of this bailout – especially with general sentiment under review – and therein lies the measured recovery in the precious metal through Monday’s session. As for speculative interests, the SPDR Gold Trust reported a 0.3 ton increase in holdings through December 11th to 1,116.55 tons last Friday while iShares COMEX Gold Trust shed 39.230 ounces to 2.631 million ounces. Perhaps the better gauge of trader interest, the COT report of net speculative holdings through last week fell 1.8 percent to 254,429 contracts. Considering the limited purchasing power of the investment world after the worst financial crisis since the Great Depression (and the general desire to diversify away from volatility); central bank interest is still the best potential source for buying heading into 2010. However, should more officials take the same stance as the Bank of Korea (that gold’s strength is ‘illusionary’), there may be little buoyancy left at record prices. Looking ahead to tomorrow; inflation expectations will be in play. Both the US and UK are set to release price gauges; but inflation hardly seems a reasonable driver for an already expensive hedge at this stage in the game.

Spot Silver  -  $17.37 //  $0.20 //  1.17%

Silver advanced for the session; but the day’s highs wouldn’t overtake the cap on congestion that develop through the end of last week. Risk trends and the dollar’s difficulty for the day were the primary drivers for this less pricey commodity. The Dubai bailout, while far from reviving risk appetite, boosted the Dow to the top a congestion band that has defined price action for the past few weeks and simultaneously pulled the dollar index back from a month high set through the end of last week. So far, this is a move of stabilization rather than reversal.

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Written by John Kicklighter, Strategist
Questions or Comments about this article? Send them to jkicklighter@dailyfx.com

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