June 2010

Crude Buffeted by Investor Worry, Chinese Growth Concerns

North American Commodity Update

Commodities – Energy

Crude Buffeted by Investor Worry, Chinese Growth Concerns

Crude Oil (LS NYMEX) -  $75.69  //  -$2.56   //  -3.27%

A cumulative drop in risk appetite and building concern over the future of growth would send the energy market tumbling through the European and US sessions Tuesday. For the US-based WTI crude futures contract, the day’s performance was particularly ugly. A 3.3 percent tumble on the day would pull the commodity back from a brief attempt at six-week highs. And, if there had not been a technical precedence set at $75.50/00, the highlights for performance could have turned out far worse. Nonetheless, the decline was the largest seen since June 4th and the rising trend channel beginning with the late May reversal was subsequently broken in the process. It wouldn’t be difficult to whip up a follow through bearish session and mark a critical reversal given the proper circumstances. However, as it stands, the CBOE’s Oil Volatility Index is still well of its highs from May and June (at 39.2 percent); while aggregate volume on NYMEX crude futures dropped to its lowest level since January 7th (375,000 contracts) through yesterday and the one-week average on open interest slipped to a similar, historic low (at 1.261 million contract). Together, these conditions suggest traders are holding back from major trend development.

On the other hand, volatility and bearish conviction may not be difficult to provoke going forward given the correct circumstances. Today’s fundamental backdrop was defined by a severe drop in speculative confidence and discouraging economic data. For traders, risk appetite was probably the greatest offender. In the early hours, concern was stoked by news that an indicator that is used to forecast economic growth in China was revised much lower than was previously stated. This leveraged persistent concerns that the best performing economy (and the emerging market it represents) would undermine the economic recovery and subsequently financial stability. This news aside, however, the true concern would develop around the European Union and the financial trouble the region faces over the coming 48 hours when the a critical, long-term ECB lending facility expires and forces banks to show their hand when they reveal how much debt must be rolled over. This could turn into another catalyst towards jumpstarting a true financial crisis; but it all depends on the results of the facility and the market’s reaction.

While there was a financial and risk-based interest in the downgrade in the data used to forecast Chinese growth; this development further undermined the energy market as the country is the second biggest energy consumer in the world. Should demand wane in China, it will certainly dent the gap between supply and consumption. Adding to these fundamental concerns we were also presented with a discouraging turn for Japanese unemployment and industrial production; while the US marked a surprisingly sharp drop in consumer confidence. This is front-line demand from the third and first largest crude users in the world. From demand to supply updates, Tropical Storm Alex is expected to accelerate to a Hurricane in the Gulf of Mexico; but landfall near the Mexico/Texas boarder is expected to miss production areas. For a modest bullish tinge on the day, the API crude oil inventory report for the week ending June 25th contracted 3.4 million barrels. This sets a positive precedence for tomorrow’s DoE report.

Commodities – Metals

Gold Staves off Another Attempt at a Bearish Reversal as European Financial Clock Ticks Down

Spot Gold -  $1,240.65   //   $1.70   //   0.14%

It is somewhat surprising that gold would not perform better today than what the commodity would put in for. Given its function as a safe haven asset that represents a harbor from currency volatility and the reverberating effects of sovereign credit risk, a direct fundamental link would suggest the precious metal would have responded dramatically to the sharp drop in risk appetite across the markets Tuesday. A normal swing in the capital markets based on investor sentiment alone would not likely produce a one-for-one rally for gold. What is needed is a clear increase in fear linked to the normal performance of the credit and financial markets. In essence, that is what we saw today. At the root of today’s 3.1 percent plunge in the S&P 500 and 3.3 percent drop in WTI crude was concern over the health of the European financial markets in the coming days. The clock is ticking for the July 1st expiration of the 12-month Long-Term Refinancing Operation facility that the ECB implemented a year ago to ensure liquidity to the banking system. This will require banks to pay back 442 billion euros to the central bank in a relatively strained period for the markets. Naturally, this could leave banks’ coffers empty; and they can either live with anemic reserves or roll forward to the three-month facility that will be opened tomorrow. Should demand for temporary funds prove extraordinary, fear that the region is barely holding it together could trigger a panic. Another concern based in Europe is the outcome of the EU stress tests. Today, three major German banks were reported to have received a clean bill of health through the financial simulation according to unnamed sources. Yet, Germany is the largest and best positioned of the region’s banks; so troubles can develop for more strategically important members like Spain.

Looking at activity levels behind the precious metal, the CBOE Gold Volatility Index rose moderately on the day (to 24.07 percent); but the increase was nowhere near the intensity that we had seen back on May 6th and 20th. Clearly, there is hesitancy in the face of the financial uncertainties in the days to come. From the futures market, net volume is still well off the levels seen this through May. On the other hand, open interest is still just off record highs (at 600,000 contracts). This level of interest vested against weak activity suggests the concept that this asset could be overpriced is starting to seep in. As it stands, the spot market is testing a long-term rising trendline; and now a general level of support around $1,225 marks the line in the sand for a stable bullish position.

Spot Silver  -  $18.49   //  -$0.28   //   -1.47%

It wasn’t difficult to ascertain which side of the market silver was tilted towards. Rather than siding with gold (which was more congestion based as it followed its fundamental guidelines), the more affordable precious metal took its cues from the traditional risk-based capital markets. Putting in for the first back-to-back decline since June 3rd and 4th, silver is still contained to a general pace of congestion with a longer-term bullish bias.

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

Global Leaders Discuss Fiscal Deficits at G-20 Meeting

At the recent G-20 meeting in Toronto, the wealthiest G-20 countries said they would halve their government deficits by 2013 and “stabilize” their debt loads by 2016, in an effort to ease investor concerns and calm markets around the world.  British Prime Minister David Cameron was most adamant about austerity measures, stating that “those countries with serious fiscal challenges need to accelerate the pace of consolidation.”  He further stated that “we have to make some unpopular but unavoidable decisions on tax and spending.”  German Chancellor Angela Merkel generally agreed with Cameron’s sentiment, saying that “there is no alternative” to cutting deficits.  U.S. President Barack Obama, on the other hand, warned that the world economic recovery “remains fragile” and urged continued spending to support economic growth.  He stated that “we cannot all rush to the exits at the same time” and that countries with surpluses should consider how they can “spur growth and spur demand.”  Japanese Ministry of Foreign Affairs spokesman Kazuo Kodama agreed, stating: “The important thing is how to strike a balance.  We can make economic growth compatible with fiscal consolidation measures.”  U.S. Treasury Secretary Timothy Geithner agreed with the general need for a global rebalancing, but came out more strongly for deficit-cutting measures than President Obama.  Geithner stated that the U.S. and Europe “have much more in common than we have differences” and that deficits have to “come down over time to a level that’s sustainable.”  Finally, Prime Minister Stephen Harper of host country Canada said: “I am confident that all countries that have made these commitments will fulfill them” and that market participants would force their hand otherwise.

Overall, the final G-20 statement reflected the general consensus that a global economic rebalance is necessary, with heavily indebted Western nations undergoing deficit reduction programs and surplus-rich Eastern nations allowing their economies to develop into a more consumer-driven model.  Little was made of the value of China’s Yuan, as the group’s agenda focused on a global scale and emphasized recent fiscal troubles in the Euro-Zone.  Based on the discussions, it appears that European countries will undergo serious fiscal consolidation in an effort to restore market confidence, while the U.S. will continue its deficit spending in the near-term and look to reign in its budget deficit further down the road.  This is generally positive for U.S. stocks in the near-term, as loose monetary policy coupled with government spending would likely buoy economic conditions and provide a boost for equities.  However, concerns remain that European nations may fall back into recession if austerity measures squash an already fragile recovery in the Euro-Zone. If this were the case, equities across the globe could be at risk of major downside pressure.

On the currencies front, the U.S. Dollar may resume its strong rally as risk-seeking investors favor U.S. equities over their European counterparts.  Recently, the EURUSD has consolidated back to the $1.23 level after falling below the $1.19 level in June.  Although austerity measures would often favor a country’s currency by restoring investor confidence, the measures soon to be undertaken in Europe may reduce the region’s already anemic growth to a point at which yield-seeking investors begin searching for other investment opportunities.  This would further undermine policy efforts in the region and could lead to a downward spiral in the currency.

Euro / US Dollar

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

Asia/Pacific Shares Fluctuate Following G-20 Meeting in Canada

Asia Session Key Developments

•    Japan’s Retail Sales Disappoints in May
•    New Zealand’s Business Confidence Extends May’s Decline

Asia/Pacific Shares Fluctuate Following G-20 Meeting in Canada

Asia/Pacific shares were mixed on Monday following the G-20 meeting in Canada this past weekend. In Japan, retail sales fell for the first time this year as labor market conditions weaken. Figures fell 0.2 percent in May from the month prior, while the annualized rate rose 2.8 percent amid economists’ expectations for a 4.8 percent rise. Looking ahead, the expected slowdown in Europe later this year is likely to impact Japan as the nation sends approximately 9 percent of its exports to the region. Meanwhile, business confidence in New Zealand fell to 40.2 in June from 48.2 the previous month. Taking a closer look at the reading, figures posted the lowest level since December 2009. Going forward, we are likely to see consumers remain under pressure as the Reserve Bank of New Zealand continues to put upward pressure on interest rates,

Nikkei 225                  9,693.94
Japanese equity markets extended Friday’s decline, leading the Nikkei 225 to shed 43.54 points (0.45 percent) and close at 9,693.94. Seven out of the ten components pushed lower on the day, with oil & gas leading the way, tumbling 2.04 percent, while health care added 0.23 percent to taper the rally. Shares of Trend Micro lost 1.42 percent as the Nikkei English News reported that the company’s pretax profit for the six months through June, while CSK plunged 4.70 percent as consumers scale back spending amid uncertainty in the global market. Moreover, Inpex dropped 1.35 percent despite having its stock rating raised from “neutral” to “outer perform.”

Hang Seng                        20,726.68
The Hong Kong market pared Friday’s decline, leading the benchmark equity market to rally 35.89 points (0.17 percent) and close at 20,726.68. Five out of the nine components pushed higher on the day, with oil & gas leading way, increasing 1.36 percent, and was followed by 0.26 percent advancement in technology. Shares of China Unicom jumped 4.68 percent, marking a seventh month high on the back of recent talks that it will launch the iPhone4. Meanwhile, Aluminum Corporation of China increased 0.48 percent on the back of higher metal prices.

S&P/ASX 200 Index    4,384.50
Shares in Australia pushed lower for a fifth consecutive day, leading the S&P/ASX 200 to decrease 28.50 points (0.65 percent) and close at 4,384.50 as all ten components lost value on the day. Shares of Macquarie Group, Australia’s biggest investment bank dived 1.39 percent, marking its worst 5 – day slump following Morgan Stanley cutting its stock rating. On the other hand, BHP Billiton slid 0.80 percent on the back of lower energy prices.

Asia/Pacific Shares Mixed Following the Massive Drop in U.S. New Home Sales

Asia Session Key Developments

•    USDCNY Erases Yesterday’s Gains
•    U.S. New Home Sales Plunge 33 Percent

Asia/Pacific Shares Mixed Following the Massive Drop in U.S. New Home Sales

Asia/Pacific shares were mixed on Thursday subsequent to new home sales in the U.S. falling 33 percent, marking the largest fall since records began. Meanwhile, the economic docket was fairly quiet overnight, however, it is noteworthy  that major currencies pushed higher against the U.S. dollar as the FED stated that they hold rates for an extended period of time. Taking at a look at the recent decision by China to de peg its currency, the effect to reinstate confidence in the market  looks to have tapered off as risk aversion seems to have regain its footing in the markets today.

Nikkei 225                  9,928.34
Japanese equity markets pared yesterday’s decline, leading the Nikkei 225 to rally 4.64 points (0.05 percent) and close at 9,928.34. Six out of the ten components pushed higher on the day, with telecommunications leading the way, climbing 1.57 percent, while basic materials lost 0.57 percent. Shares of Toyota Motor lost 0.78 percent as the automaker is preparing to resume production at its factory in Guangzhou, China location. Meanwhile, Japan Steel Works rose 1.06 percent on the back of higher metal prices, while Chiba Bank rose 0.36 percent as the bank said it is likely to beat annual profit forecast this year.

Hang Seng                        20,733.49
The Hong Kong market pared yesterday’s advance, leading the benchmark equity market to slip 123.12 points (0.59 percent) and close at 20,733.49. Four out of the nine components dropped on the day, with basic materials leading the way, tumbling 1.55 percent, while technology added 1.11 percent. Shares of CNOOC retreated 1.51 percent as energy prices looked to have extended yesterday’s decline, while China Mobile slumped 0.44 percent as DBS Vickers cut the company’s rating from “buy” to “hold.”

S&P/ASX 200 Index    4,4479.70
Shares in Australia decreased for a second straight day, leading the S&P/ASX 200 to drop 6.40 points (0.14 percent) and close at 4,479.70. Half of the components pushed lower on the day, with technology leading the way, tumbling some 1.28 percent, while telecommunications jumped 1.56 percent. Shares of BHP  Billiton jumped 1.30 percent as the company alongside Rio Tinto financed a seven-week advertising campaign to end a mining tax in Australia, while Fortescue Metals rose 2.48 percent as metals continue their northern journey.

Written by Michael Wright, Currency Analyst
Questions? Email me at mwright@fxcm.com

Negative Investor Sentiment, Mixed Data Leads Crude to Close its Monday Open Gap

North American Commodity Update

Commodities – Energy

Negative Investor Sentiment, Mixed Data Leads Crude to Close its Monday Open Gap

Crude Oil (LS NYMEX) -  $77.21  //  -$0.61   //  -0.78%

Looking much like the intraday bearish reversal from Monday, the US benchmark crude futures contract (the NYMEX-based WTI) put in for a close in the red through the end of the New York floor session. This move has pushed crude to fully close the gap that opened the week and drove the commodity to a one-month high. This lack of commitment is partially attributable to the failed attempt to catalyze investor confidence on the news that Chinese officials had moved away from the yuan’s peg to the US dollar and would allow the exchange rate to adjust within limits. Today, the yuan put in for its largest daily decline since December of 2008; and a 1.6 percent drop from the S&P 500 portrayed a return to skepticism amongst investors. Further curbing the appetite for yield (and the risk that comes with it), both Japan and the United Kingdom issued significant budget updates. Though ambitious goals have been laid out to rein in record fiscal deficits and improve the financial standings of the major industrialized economies, the implications for economic activity (and thereby energy demand) are negative. Further depressing speculative interests, a renewed focus on the stability and health of private European banks is pulling traders back to one of the sore spots in global finance.

Turning the focus back on tangible fundamental, the economic docket would have its ups and downs for expected output and demand. During Europe trading hours, the commodity was offered a boost when the German IFO business sentiment survey for June reported confidence was at its highest level since May of 2008. This improvement was the responsibility of the current conditions component of the survey, while the expectations figure actually slipped a second month. Such a divergence could lead to plans to cull activity and thereby trim energy needs. With the US session, the economic data was uniformly discouraging for oil. Existing home sales for the month of May unexpectedly fell 2.2 percent. Then, later in the day, the API crude inventory report for the week ending June 18th marked a 3.685 million barrel increase in stockpiles. Looking ahead to tomorrow, the DoE equivalent is expected to print a 800,000-barrel drop in holdings; but the lack of response with previous releases sets the bar low on this particular event.

For futures traders, today was the last trading day of the July 2010 WTI futures contract, leading the market to roll out to the August contract. Notably, open interest on this new front month reached a record and volume was just off a yesterday’s high (219,929 contract turnover); but aggregate net interest and volume are still excessively low. In fact, overall open interest is at its lowest level (at 1.272 million contracts) since February 22nd.  Furthermore, the CBOE Oil Volatility index is still well off its highs from a month ago (at 35.5 percent); and the premium between the active nearby and the two-year deferred futures contract has widened modestly to $7.55.

Commodities – Metals

Uncertainty on the Yuan, European Finances Stabilizes Gold

Spot Gold -  $1,239.65   //   $5.95   //   0.48%

Just as quickly as a surprise decoupling of the yuan from the dollar can stoke fantasies that China is performing better than expected and the global recovery will be more balanced, reality comes crashing back to balance out the long-term troubles facing the global financial market. With the high hopes over the Chinese shift from a fixed exchange rate regime to managed float having passed, traders are once again falling back on the here-and-now. The markets would have a very interesting mix of macroeconomic data and fiscal stability updates to work with – exactly what the precious metal uses to derive fundamental activity. For economic health, the modest improvements in business sentiment in Germany and consumer confidence for the broader Eurozone was offset by the weak performance of the US housing market.

The real market-moving announcements were related to the fiscal and financial health of the larger economic regions. In the Asian session, Japanese Prime Minister Naoto Kan projected a balanced budget by 2021 with an effort to cap annual spending to 71 trillion yen over the coming three years. Both Standard & Poor’s and Fitch maintained a sense of skepticism however in anticipation of details as to how this ambitious target would be met.  Later in the European session, anticipation was high for the United Kingdom’s own budget announcement. The tax hike, bank levy and cut to welfare spending were expected to translate into a significant reduction in spending; but ratings agencies have yet to assess whether this is enough to prevent a downgrade for the nation later down the line. With little hint of a positive spin, the focus in European trading hours would also turn to regional banks. ECB board member Noyer  suggested some banks are facing funding problems as confidence deteriorates. Alternatively, in his own testimony to the TARP Oversight Panel, Treasury Secretary Timothy Geithner said that credit was thawing in the United States and would contribute to growth going forward.

Looking at futures activity, the active August COMEX contract reported a dip in activity commensurate to the tame turn in underlying price action. That being said open interest for the contract rose to a new high through yesterday at 371,000 contracts. Further delayed aggregate volume figures are significantly lower than the late May levels while net interest has risen to a new record high of 603,000 contracts. It is also worth making note of the general decline in the premium difference between the August 2010 contract and the August 2012 counterpart (now at $33.60) since last June’s high of $53.20. This potential points to tempered interest in the commodity going forward.

Spot Silver  -  $18.80   //  $0.07   //   0.37%

There was relatively little volatility behind silver trading Tuesday after two days of excessive price action. Volatility was generally dampened by the mute pace of speculative activity behind the speculative crowd; but direction would further be discouraged by a stalled gold market and the third daily advance for the dollar (not to mention the slip in risk appetite that no doubt helped to bolster the currency). Looking at the futures market, the active July 2010 COMEX contract has seen volume cool from the spikes seen on negative price action days. Open interest on the contract has steadily decline since mid-May. On the other hand aggregate open interest has slowly climbed to highs not seen since November as investors look for potential exposure to gold and the expected economic recovery without having to pay the premium.

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

Global Equities End Longest Rally in Eleven Months

U.S. Session Key Developments

•    Asian, European, and U.S. Stocks Close Lower On the Day
•    U.S. Existing Home Sales Unexpectedly Decline in May
•    Dollar Rallies Against Euro and Commodity Currencies

Stocks sank across the board today, sending the MSCI World Index lower by 1.4 percent to end its longest winning streak in eleven months.  The world index, which had closed higher in each of the prior ten sessions, declined as U.S. existing home sales disappointed and new concerns arose regarding the BP oil spill.  Initially, U.S. stocks actually traded higher to begin their session, but investor optimism was blunted by news that existing home sales unexpectedly fell 2.2 percent to a 5.66 million annual rate in May, following an 8 percent rise in the month prior.  The weak data spurred investor concerns over the strength of the economic recovery and evidenced that further weakness in housing remains possible.  Furthering investor uncertainty was a report from the Obama administration that said it will appeal a federal judge’s ruling to lift a six-month moratorium on deepwater drilling.  The news pushed shares of BP, Transocean, and Halliburton lower by at least 2 percent each.  As for commodity prices, crude oil closed the day down 0.4 percent to $77.53 a barrel, while gold rallied slightly to close above the $1240 level.  Concerned investors continued to seek out the yellow metal for its “safety” qualities and also purchased U.S. dollars in favor of the euro and commodity currencies.  The U.S. Dollar Index rallied for a fourth time in five days, closing at 86.106, its highest level since June 14.

DJIA 30                        10,293.52                           -148.89                         -1.43%
The broad-based Dow Industrial Average dropped over 1 percent on the day as twenty-seven of the thirty index stocks closed in the red.  Aluminum giant Alcoa was the worst performer on the index, dropping over 3.6 percent, while Boeing, Home Depot, and Caterpillar fell over 2.4 percent.

S&P 500                         1,095.31                               -17.89                            -1.61%
The S&P 500 posted the largest decline among major U.S. indices as industrials, utilities, and commodity-related shares fell over 2 percent each.  Prospects of the Obama administration appealing a court decision to lift the moratorium on deepwater drilling drove shares of Chevron, ConocoPhillips, and STO down at least 2 percent each.

NASDAQ                        2,261.80                            -27.29                          -1.19%
Shares on the tech-heavy Nasdaq showed weakness today as all ten of its sectors closed in the red, including technology shares which fell over 0.7 percent.  Cisco and Applied Materials fell over 1.5 percent on the session, while Apple shares managed to gain 1.1 percent.

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

Asian Shares Fail to Hold Onto Monday’s Gains

Asia Session Key Developments

•    New Zealand’s Credit Card Spending Shows Improvement
•    Japanese Supermarket Sales Slump in May
•    China’s Decision to De Peg Yuan Fails to Hold Confidence

Asian Shares Fail to Hold Onto Yesterday’s Gains

Asian shares pared yesterday’s rally in which China unleashed its yuan. However, investors digested this as  a political move. Additionally, comments from the European Central Bank reignited concerns over the sovereign debt.  Meanwhile, credit card spending in May increased, while Japanese supermarket sales slumped an annualized 5.3 percent in May.

Nikkei 225                  10,112.89
Japanese equity markets pushed lower on Tuesday after rising to its highest level since June 18th yesterday, leading the Nikkei 225 to slump 125.12 points (1.22 percent) and close at 10,112.89 as all ten components pushed lower on the day. Shares of Honda Motor lost 1.00 percent as a looser yuan raises the cost at plants in China’s Pearl River Delta, while NGK Insulators tumbled 1.54 percent following Credit Suisse lowering the company’s the company’s stock-price estimate from 1,600 yen to 1,350 yen. Moreover, Toyota slipped 0.61 percent lower as the automaker halted production at a car plant in Guangzhou.

Hang Seng                        20,819.08
The Hong Kong market pared yesterday’s rally, leading the benchmark equity index to slip 93.10 points (1.18 percent) and close at 20,819.08. Eight out of the nine components lost value on the day, with technology leading the way, dropping some 4.54 percent, while consumer goods added 1.59 percent to taper the selloff. Shares of PetroChina slid 0.65 percent on the back of lower energy prices, while Bank of Communications rose 0.22 percent after the bank successfully raised 17.13 billion yuan.

S&P/ASX 200 Index    4,558.34
Shares in Australia declined on the day, leading the S&P/ASX 200 to fall 54.26 points (1.18 percent) and close at 4,558.34 as all ten components tumbled on the day. Shares of Platinum Australia increased 0.64 percent on the back of higher metal prices, while Origin Energy lost 1.07 percent following announcements that the company may acquire Alinta Energy.

Crude Squanders Early Rally on News China Had Dropped its Peg

North American Commodity Update

Commodities – Energy

Crude Squanders Early Rally on News China Had Dropped its Peg

Crude Oil (LS NYMEX) -  $77.32  //  $0.14   //  0.18%

The big news on the morning – that China had ended a two-year stint fixed rate regime – would not go unnoticed by oil traders. From a speculative perspective, this announcement was interpreted as a sign that capital markets should roar ahead; and for the fundamentally inclined, the news could be understood to mean the global economy would be able to put in for a more balanced economic economy. Yet, neither of these considerations would ultimately result in a lasting bullish assistance for the commodity. Following the opening gap for the futures market, the active NYMEX crude contract was spurred on to its biggest advance in six weeks before it ultimately all of the active session gains. It should be noted that tomorrow is the last trading day for the July 2010 crude contract. That being said, aggregate volume for the market dropped to its lowest level since March 30th (459,259  contracts) this past Friday as open interest plunged to its lowest level since March 1st (1.283 million contracts).

Looking at the fundamental activity through the session, there was very little on the economic docket through the opening 24 hours of the trading week. That wouldn’t end up being a problem for volatility development given the response to the People’s Bank of China’s announcement that the country was abandoning its fixed exchange rate regime against the benchmark dollar. The implications for this development are potentially remarkable; but much of it is simply speculative at this point. For those using crude as an trading asset, China’s liberal turn would seem a sign that the globe’s top investment destination is performing better than many had thought. Furthermore, this move could balance political tensions ahead of this weekend’s G20 with those officials claiming China was holding its currency artificially low in orders to stoke exports. However, from a supply-and-demand perspective, a move from a fixed exchange rate to a closely managed regime gives the impression that the world’s recovery will be better balanced with some industrialized nations finding themselves on a more competitive footing while the world’s second largest economy boosts its own consumption habits. Yet, these after effects will come much later; and the controlled nature of the FX policy will not allow for dramatic changes when they are needed the most.

Looking ahead to tomorrow, there will no doubt be echoes from the China announcement; but fundamental interests will be able to tune back into the calendar for defined macroeconomic events.  The German IFO business confidence survey will be particularly important for energy traders; but US existing home sales and Euro Zone consumer confidence will be worth analyzing for growth expectations. At least, with the difference between the active NYMEX futures contract and the two-year deferred contracting to $7.78, we can see through the immediate volatility of today’s session an improvement in the market’s outlook.

Commodities – Metals

Failed Follow Through Followed by Sharp Tumble as Gold Suffers from Improved Sentiment then Dollar Strength

Spot Gold -  $1,233.50   //   -$23.30   //   -1.85%

Just one trading day after gold put in for a dramatic technical breakout to a new record high, the metal has entered into a deep retracement. The spot market put in for its worst daily decline in just over a month Monday, dramatically changing the outlook for the market. Typically, after a meaningful break from congestion (and this was meaningful after developing a month-and-a-half long ascending triangle pattern), a fresh wave of investors are attracted to the market as the commodity makes headlines. Yet, it seems gold may have already saturated investors’ awareness and the sheer cost of the asset is leading to second thoughts.

For fundamental inspiration, the Chinese news was a particularly interesting announcement. Given gold traders’ preoccupation with sovereign credit risks, this particular headline would have a unique interpretation. What does a switch from a fixed exchange policy to a managed one mean for sovereign risks globally? This is a move that will ease global tensions arising from the call of currency manipulation which could further protectionist agendas that would further hurt international capital flow. What’s more, such a move is a sign that the world’s second largest economy is strong enough to take a step that could potentially invite greater volatility into the economy. This helps to offset building concern that China may be on pace to suffer a credit market collapse due to the overheated lending activities of the previous years – if only to distract from this very real problem for a short time. And, later in the US session when the speculative good will of the Chinese announcement was run through, the selling effort behind gold wouldn’t let up thanks to an impressive recovery for the US dollar – the primary alternative as its own safe haven.

It is interesting to note that open interest on the COMEX futures contract rose to an all-time high this past week. Yet, with today’s price action, it is interesting to note that the most active contract (the August 2010 expiry) would not see a particularly dramatic increase in volume. Furthermore, the CBOE Gold Volatility Index was little moved despite the significant drop in underlying price action.

Spot Silver  -  $18.75   //  -$0.43   //  -2.24%

Silver’s efforts were limited at the get go. On the open of electronic trading, metal traders were encouraged by China’s news that policy officials had shifted tack on the currency exchange rate. The bolster this news offered investor sentiment was undeniable; but silver’s correlation to these moves would be muted by its links to gold. By the afternoon of the US session when risk appetite was on the retreat, the speculative commodity would find another negative drive in the former of the US dollar. That being said, volume on the active COMEX futures contract rose to a two week high as aggregate open interest sustained its march higher through the end of last week.

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

Asian Shares Rally as China Resumes Currency Appreciation

Asia Session Key Developments

•    Stocks Rally Amid China’s Currency Reform
•    MSCI Asia Pacific Index Posts Longest Winning Streak in 11 Months
•    Gasoline Rises to its Highest Level in 6 Weeks
•    Corn Rises to Highest in Three Months
•    Gold Rallies to Post a Fresh Record High

Asian Shares Rally as China Resumes Currency Appreciation

The spotlight during the Asian trade was China’s recent announcement that it will resume currency appreciation. This announcement comes on the back of global criticism, and looks to have fueled risk appetite as all major currencies except for the Japanese yen rallied against the U.S. dollar overnight. However, it is noteworthy that following the decision, the People’s bank of China stated that with the balance of payments “moving closer to equilibrium, the basis for large-scale appreciation of the RMB exchange rate does not exist.” Additionally, policy makers went onto reiterate its longstanding policy that the exchange rate would remain “basically stable.” Meanwhile, New Zealand’s immigration growth slowed for a fourth straight month, while Japan’s all activity index pushed higher for the second time in the past five months. Nonetheless, in Australia, new motor vehicle sales declined in May after the reading rose at the fastest pace since 2001 in the month prior.

Nikkei 225                  10,238.01
Japanese equity markets rallied to its highest level since June 18th, leading the Nikkei 225 to climb 625.47 points (2.43 percent) and close at 10,238.01. Nine out of the ten components rallied on the day, with industrials leading the way, climbing 3.48 percent, while telecommunications lost 0.08 percent to taper the advance. Shares of Fast Retailing rose 1.42 percent as the company was rated new “equal weight” at Barclay’s Capital, while Toyota Tsusho jumped 6.60 percent as the trading company was raised to “outer perform” from “neutral” by Daiwa Securities.  At the same time, Mitsubishi Estate added 2.55 percent as Japan’s real estate shows signs of recovery amid the turnaround in prices of secondary homes transactions as consumer confidence continue its northern journey.

Hang Seng                        20,912.18
The Hong Kong market pushed higher on the day, leading the benchmark equity index to climb 625.47 points (3.08 percent) and close at 20,912.18. Eight out of the nine components rose on the day, with basic materials leading the way, adding 5.17 percent, and was followed by a 3.81 percent advancement in industrials. Shares of PetroChina soared 4.54 percent as gasoline rose to its highest level since six weeks, while Aluminum Corporation of China soared 4.98 percent on the back of higher metal prices. Moreover, Bank of China Hong Kong edged 0.79 percent higher as Fitch confirmed the company’s credit rating of “A” with a stable outlook.

S&P/ASX 200 Index    4,612.60
Shares in Australia advanced for the second straight day, leading the S&P/ASX 200 to jump 60.70 points (1.33 percent) and close at 4,612.60. Nine out of the ten components pushed higher on the day, with telecommunications leading the way, rising 3.20 percent, while consumer goods slump 0.13 percent. Shares of Fortescue Metals rose 4.58 percent on the back of higher metal prices, while Lihir Gold advanced 1.15 percent as gold futures rose to a record of $1,263.70/oz during the Asia trade.

Written by Michael Wright, Currency Analyst
Questions? Email me at mwright@fxcm.com

Asian Shares Track Wall Street’s Rally Amid Stronger than Expected Manufacturing Figures

Asia Session Key Developments

•    Copper Prices Rise for a Sixth Straight Day
•    Gold Surges to the Highest Level in a Week
•    Japanese Markets Rise to the Highest Level Since May 20th

Asian Shares Track Wall Street Rally Amid Stronger than Expected Manufacturing Figures

Japanese and Australian shares look to have pushed higher on Wednesday, following gains on Wall Street. Meanwhile, New Zealand’s consumer confidence in the second quarter pushed higher as the economic recovery gathers pace. In Australia, weaker than forecasted leading index and dwelling starts suggests that the recovery is tapering off following the Reserve Bank of Australia’s judgment to keep borrowing costs unchanged at its rate decision in May. Looking ahead, the RBA may hold rates next month as ballooning budget deficits in Europe continue to pose considerable risks for the global economy. Away from the high yielding currency, in Japan, market participants witnessed the fall of machine tool orders tumbling for a second uninterrupted month. With regards to the fundamental developments in the world’s third largest economy, the Bank of Japan recently announced a new lending facility at its May meeting in which the central bank will provide 3 trillion yen worthy of low interest rate loans to banks in order to stimulate investment which had fallen tremendously in the period of 2007 – 2009. Nonetheless, overnight, copper prices rose a sixth successive day as a weaker dollar boosted the demand for commodities. Also worth noting, gold prices rallied to the highest level in a week.

Nikkei 225                  10,067.15
Japanese equity markets rose to the highest level since May 20th, leading the Nikkei 225 to rally 179.26 points (1.81 percent) and close at 10,067.15 as all ten components pushed higher on the day. Shares of Fujifilm Holdings rose 2.19 percent as the Nikkei English News reported that the filmmaker set a target of a return of assets of at least 5 percent in the year ending March 31st, while Kirin Holdings rose 2.81 percent despite the company stating that it will investigate corporate governance at its group companies after its unit made “improper” business transactions. Moreover, Sony tipped 0.96 percent higher amid the company demonstrating new 3-D capabilities for video games.

Hang Seng                        20,062.15
Closed in observance of Dragon Boat Festival

S&P/ASX 200 Index    4,559.00
Shares in Australia pushed higher on the day, leading the S&P/ASX 200 to leap 54.00 points (1.20 percent) and close at 4,559.00. Eight out of the ten components rallied, with basic materials leading the way, climbing 2.26 percent, while consumer goods lost 0.75 percent. Shares of BHP Billiton advanced 2.19 percent as copper prices rose for a sixth consecutive day, while Sims Metal Management, the world’s largest recycler of scrap metal surged 3.55% as the stock’s credit rating was raised from under perform” to “outer perform.”

Written by Michael Wright, Currency Analyst

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