Fundamentals

Crude Follows Other Capital Markets by Shaking off Fed’s Surprise Stimulus Withdrawal

North American Commodity Update

Commodities – Energy

Crude Follows Other Capital Markets by Shaking off Fed’s Surprise Stimulus Withdrawal

Crude Oil (LS NYMEX) -  $79.79  //  $0.73 //  0.92%

The late session drop from crude yesterday in response to a surprise tightening of the Fed’s monetary policy proved temporary (just as it was for the US dollar). Broad-based risk appetite recovered its footing and developed reasonable momentum, lifting the trader-friendly commodity to a five-week high while simultaneously keeping within the general channel that has defined price action since the February 5th reversal. This price action was certainly having its influence on positioning. According to the CFTC’s Commitment of Traders (COT) report, net speculative long positioning in light sweet crude on the NYMEX jumped 63 percent to 68,436 contracts through the week ending February 16th. Notably, this represents only 5.3 percent of net open interest. The contrast of the weekly advance and the generally depressed interest behind the commodity mimic the sentiment that underlies price action. Most capital markets have climbed slowly this past week; but the threats to stability are numerous and certainly growing in scope. Looking forward, the two most immediate threats to speculative positioning are the potential that a European Union crisis will spread from Greece and concern that the withdrawal of stimulus and accommodative monetary policy will expose an otherwise week market.

As for the fundamental balance between supply-and-demand, today’s macro data added little to a strong growth forecast. Indeed, this was the overall theme for the entire week. Today, a 1.2 percent drop in January UK retail sales was offset by an increase in the Euro Zone’s manufacturing activity survey for February. Neither of these indicators would have an overwhelming impact on the broader levels of global consumption. Recently, the API reported US fuel consumption through the month of January fell to its lowest level for that particular month in 12 years. Considering global policy officials have lowered trimmed their growth projections and have stepped up their efforts to withdrawal the same stimulus that fueled reinvestment through 2009, it will be difficult for demand to catch up to current levels of output (even in their notably depressed state). Next week, there is plenty of scheduled event risk to tip the scales of supply and demand; but the revisions for US, German and UK GDP will hold the most tout through the component figures adjustments. Another consideration for the week’s open is the expiration of the March oil contract on the NYMEX. Rolling over positions will undoubtedly skew price action.

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Commodities – Metals

Gold Mirrors the Dollar’s Reversal Leaving the Metal to a Distinct Range

Spot Gold  -  $1,119.99  //  $11.29 //  1.02%

Both gold and the US dollar would resuscitate their distinct correlations to risk appetite trends (on opposite sides of the scale). The revived relationship between markets would help to amplify the dramatic swing in underlying sentiment trends. Following the close of the active US session Thursday, the Federal Reserve’s surprise hike to the discount lending rate sparked a sense of fear that mirrored the reaction to China’s repeated increase to its own reserve ratio. This step by the world’s largest central bank is aimed at normalizing monetary policy; but it has the very significant side effect of removing the same stimulus that nursed risk appetite back to health through 2009. This effort is building steam globally and will keep pressure on speculative interests for some time to come. However, taking stock of the general sentiment for the week, traders deemed the immediate reaction to the Fed’s hike as overblown. The safe-haven dollar would pullback from eight-month highs; and gold would find encouragement from both the currency and risk appetite. On the other hand, there are a few interesting notes to be made. First of all, the precious metal has not held consistently at a $1,125 range high. In contrast, gold priced in euros would hit a record high (reflecting the fiscal and economic troubles in the Euro Zone). Another notable development was the divergence in Friday’s price action and inflation pressures. The US CPI figures cooled unexpectedly in January – reducing the metal’s value as an inflation hedge. According to the COT figures, net long speculative positioning grew by 7,399 contracts to 188,858 in the week through Tuesday.

Spot Silver  -  $16.32 //  $0.47 //  2.94%

Another solid rally would extend silver to its highest level in two weeks; and yet the metal would not leave the comfort zone defined by the rising trend channel from the February 5th reversal. The boost in volatility and steady bullish bearing would be found through the concurrent influences of a jump in risk appetite and drop in the US dollar. Avoiding the burden of most swells in economic data and concerns over inflation, this commodity is playing its role as a speculative asset well. Looking ahead to next week, the dollar’s divergence to risk trends will likely close as the latter picks up momentum. This will likely unify and intensify silver’s momentum. Looking at speculators interest, the COT figures reveled a modest 1.7 percent increase in net long positioning to 25,378 contracts.

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