June 2010

Oil Traders Hesitant in Showing Confidence after Hungary Backtrack

North American Commodity Update

Commodities – Energy

Oil Traders Hesitant in Showing Confidence after Hungary Backtrack

Crude Oil (LS NYMEX) -  $71.12  //  -$0.39   //  -0.55%

Risk appetite and confidence in the performance of the global economic remained depressed through Monday’s session despite efforts to revive investor sentiment. For crude – which relies on forecasts for consumption trends as well as speculative interests – the deflated state would keep the active nearby contract on the NYMEX near an eight-month range low while the market’s volatility reading hovered just below an 11-month high 49 percent set just two weeks ago. Bulls were looking to the change in tack by Hungarian officials – recanting warnings last week that the economy was on the verge of default – to immediately revive confidence. However, this reversal would leave market participants skeptical over the European region’s economic and financial health especially when it comes to reinterpreting the overly-optimistic take that policy officials voice. What does financial trouble for Hungary mean to energy traders? A default for this periphery European Union member could lead to significant losses for neighboring nation’s which had invested in the nation’s debt; and more critically it could dramatically depress confidence in the European region in general. This could lead to a full-blown financial crisis for the region or even the world and thereby curb speculative interest in risky assets like crude. Furthermore, with financial health on the decline, growth would almost certainly be undermined, further stalling a necessary balancing of supply and demand factors for the market.

Returning a modest level of optimism to the commodity through the day were a few macroeconomic indicators on the European and US dockets. During European trading hours, two indicators of note boosted confidence and demand expectations: German factory orders and the Sentix Eurozone Investor Confidence survey. The April orders number would unexpectedly grow 2.8 percent, leading the yearly figure to expand at its fastest pace on record (29.6 percent). This is a critical measure of economic activity for Europe’s largest economy. Offering a different view, the Sentix confidence report for June unexpectedly recovered from its worst tumble in two years, though the measure would still reflect net pessimism for the 23rd time in 24 months. This is a promising turn given the very severe concern surrounding Europe’s financial future. Another booster for growth, and thereby demand, forecasts came from the US consumer credit report for April. Unexpectedly rising $1 billion, this report suggests that consumer spending is on pace to recover and lending conditions are improving – both critical steps towards robust expansion for the world’s largest economy.

Taking a different approach to the futures market, there are a few things to note about recent price action. The first is the lack of response to Friday’s plunge. While price action was quite substantial this past Friday in response to the Hungary news and its speculative fallout, both volume and open interest on the benchmark NYMEX contract were relatively unchanged. That suggests a lack of follow through on the news. Another interest note is that the spread between the active WTI contract traded in the US and the Brent contract standard in the UK is once again widening (and now at $0.89). Finally, contango in US oil markets partly in response to the Gulf of Mexico oil spill and its expected impact on regulations expected to be adopted in its wake. The difference between the active contract and that eight years forward is a remarkable $22 per barrel.

Commodities – Metals

Euro’s Persistent Tumble Sends Investors to Gold as Safety Sought Outside Currencies, Government Debt

Spot Gold -  $1,241.35  //  $21.45  //  1.76%

Just when it seemed investor sentiment has stabilized, gold has surged ahead. Spot trading record its biggest one-day rally in nearly a month, bringing the market dangerously close the record highs set back in the middle of May. Interestingly enough, the CFTC’s Commitment of Traders survey reported net speculative long positions actually fell by 1 percent to 224,546 contracts on the Comex in the week through June 1st. In reality, this is a modest slip given the proximity of open interest to the record high set this past October. However, today’s upsurge would not originate from positioning news. Strength was instead found on the need for safety and an alternative to the traditional ‘risk-free’ assets. This may seem an unusual development given Hungary’s reversal on its default warning from Friday; but in truth, confidence in policy officials’ commentary has diminished remarkably in recent months. Last week’s warning stands as a remarkable episode of candidness that will not be soon forgot by investors that are skeptical of the future. Furthermore, the fact that the euro was unable to make up lost ground against the benchmark US dollar on this news confirms investors’ position and stokes demand for an asset that can avoid the most severe financial ripples that would result in a global crisis. Further adding to the impression of uncertainty, German Chancellor Merkel announced 80 billion euros in budget cuts over four years, lending liquidity in China further dried up according to seven-day repo rates and Spain prepared for another strike tomorrow. It wouldn’t take much for spot gold to set a new record high in the near future.

Spot Silver  -  $18.19   //  $0.74  //  4.24%

The first advance in five trading sessions has led spot silver to more than recover the ground lost Friday after equities collapsed. The fundamental spark for this metal was not hard to spot. Considering risk appetite was slipping alongside traditional speculative markets like equities (the S&P 500 fell 1.4 percent), silver traders were taking direction and intensity cues from gold. Interestingly enough, other members of the precious metal group were looking at modest gains of their own while industrials fell substantially. This may reflect a rise in demand for a safe haven on the level of gold but well below its exorbitant cost.

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 Halt Yesterday’s Rally as Chinese Growth Remains a Significant Risk

Asia Session Key Developments

•    China Offers Auto Subsidies
•    RBA Rate Decision on Tap Next Week

Asian Shares Halt Yesterday’s Rally as Chinese Growth Remains a Significant Risk

Asian Shares pared yesterday’s rally as the world’s two largest copper producers stated that China’s plans to curb growth will lower the demand for the metal, leading the MSCI Asia Pacific Index to retreat 03 percent.  Policy makers in the world’s second-largest economy are expected to raise rates sometime in the near future as the central bank aims to cool the boiling housing market. Additionally, the Chinese government is offering auto subsidies as they fears a pull back in the demand for the auto sector. Looking ahead, the Reserve Bank of New Zealand is set to join the increasing list of Asian central banks withdrawing monetary policy stimulus from the economy next week.

Nikkei 225                  9,901.19
Japanese equity markets pared yesterday’s advance, leading the Nikkei 225 to slump 13.00 points (0.13%) and close at 9,901.19. Six out of the ten components pushed lower on the day, with telecommunications leading the way, falling 1.73 percent, while oil & gas rallies 1.05 percent to taper the decline. Shares of Secom lost 2.01 percent as the security services company was slashed from “outer perform” to “neutral” at Credit Suisse Group AG, while Sumitomo jumped 1.23 percent as the company was downgraded by Morgan Stanley from “strong outer perform” to “outer perform.” At the same time, Sumitomo Metal Mining lost 0.94 percent on the back of lower metal prices.

Hang Seng                        19,780.07
The Hong Kong market pared yesterday’s advance, leading the benchmark equity index to retreat 6.64 points (0.03%) and close at 19,780.07. Six out of the nine components pushed lower on the day, with oil & gas leading the way, falling some 0.079 percent, while consumer goods rally 1.00 percent. Shares of CNOOC lost 0.96 percent on the back of lower energy prices, while China Unicom dropped 1.28 percent despite having its rating raised from “fully valued” to “hold.” Meanwhile, Aluminum Corporation of China lost 1.72 percent, following two or Asia’s largest copper producers stating that China’s plans to curb growth will have a large impact on the metals going forward.

S&P/ASX 200 Index    4,449.40
Shares in Australia halted yesterday’s advance, leading the S&P/ASX 200 to plunge 36.60 points (0.82%) and close at 4,449.40. Half of the ten components tumbled lower on the day, with technology leading the southern descent, falling some 2.68 percent, and was followed by a 1.82 percent decline in basic materials. Shares of National Australia Bank plunged 2.91 percent as the bank has dropped out of the running to buy Royal Bank of Scotland Group’s U.K. branches, while CSL rallied 2.79 percent subsequent to UBS AG stating that second-half sales in the U.S. may beat estimates.

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

Asian Shares Pare Yesterday’s Decline, Tracking Wall Street’s Rally amid a Positive Economic Docket

Asia Session Key Developments

•    Japan’s Capital Spending Weakens for the 12th Straight Quarter
•    Australian Exports Rise the Most in Three Decades
•    Hong Kong’s PMI Index Weakens in May

Asian Shares Pare Yesterday’s Decline, Tracking Wall Street’s Rally amid a Positive Economic Docket

Asian shares pared yesterday’s decline as bourses in the region rebounded sharply from Wednesday’s southern descent on the back of positive economic data from the U.S. Meanwhile, Japan’s capital spending weakened for the 12th successive quarter, while Australian exports rose the most in three decades.

Nikkei 225                  9,941.19
Japanese equity markets pared yesterday’s decline, leading the Nikkei 225 to rally 310.95 points (3.24 percent) and close at 9,941.19 as all ten components pushed higher on the day. Shares of Taiyo Yuden rose 3.55 percent as Macquarie Group raised the company’s stock rating from “underperform” to “outer perform,” while Fast Retailing, Japan’s largest clothing chain operator surged 7.23 percent after sales at its Uniqlo chain in Japan pushed higher for the first time in three months. At the same time, Panasonic added 4.45 percent subsequent to the electronics maker saying that it will begin selling the world’s lightest convertible tablet notebook PC in Japan.

Hang Seng                        19,786.71
The Hong Kong market halted yesterday’s southern journey, leading the benchmark equity index to advance 314.91 points (2.40 percent) and close at 19,786.71. Eight out the nine components rallied on the day, with consumer goods leading the day, climbing 3.41 percent, while utilities lost 0.20 percent to taper the advance. Shares of China Petroleum & Chemical added 1.00 percent on the back of higher energy prices, while Sino Land jumped 3.04 percent as home sales increased an annualized 8.7 percent in May.

S&P/ASX 200 Index    4,486.00
Shares in Australia pared yesterday’s decline, leading the S&P/ASX 200 to climb 105.00 points (2.40 percent) and close at 4,486.00 as all ten components advanced on the day. Shares of BHP Billiton advanced 2.41 percent as the company is considering tripling the capacity of a revived Indonesian coking coal project, while Bank Queensland increased 2.55 percent as the bank announced the appointment of Mr. Darryl Newton as the Bank’s new Chief Risk Officer. Moreover, Roc Oil leapt 10.45 percent as the energy explorer’s stock rating was raised from “hold” to “buy” at BBY Limited.

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

Asian Shares Head South amid Japan’s Prime Minister Resigning

Asia Session Key Developments

•    Japan’s Prime Minister Resigns
•    China Releases Resource Tax
•    Australian GDP Advanced 0.5 Percent in the First Quarter
•    New Zealand’s ANZ Commodity Prices Rises for the 14th Straight Month

Asian Shares Head South amid Japan’s Prime Minister Resigning

Asian shares extended yesterday’s losses as Japan’s prime minster resigned. The resignation marks the fifth straight year in which a new prime minister has taken office in Japan, and does not hold well for the third largest economy in the world as Japan needs to make significant changes to its fiscal policies in order to social and economic problems going forward. Nonetheless, China’s boiling housing market and inflation concerns needs not to be placed in the background. Meanwhile, the economic docket during the Australian trade showed that economic activity in the first quarter rose 0.5 percent, led by a 11.6 percent increase in public investments, while the annualized reading jumped 2.7 percent from the previous three months through December. A separate showed that New Zealand’s commodity price index in May pushed higher for the 14th straight month, while Japan’s monetary base rebounded for the second successive month.

Nikkei 225                  9,603.24
Japanese equity markets extended yesterday’s losses, leading the Nikkei 225 to shed 108.59 points (1.12%) and close at 9,603.24. Eight out of the ten components pushed lower on the day, with oil & gas leading the way, tumbling some 1.82 percent, while utilities rallied 1.34 percent. Shares of Fast Retailing lost 1.50 percent as domestic sales despite its Uniqlo clothing chain rising 3.1 percent in May from the previous month, while Honda Motor, Japan’s second – largest carmaker retreated 1.85 percent following the recent worker walkout that shutdown all of the company’s production in the country. In addition, Kobe Steel dived 1.57 percent on the back of lower metal prices.

Hang Seng                        19,471.80
The Hong Kong market pushed lower for a third consecutive day, leading the benchmark equity index to slump 25.15 points (0.13%) and close at 19,471.80. Seven out of the nine components retreated on the day, with consumer services leading the way, down some 2.01 percent, and was followed by a 1.09 percent lost in basic materials. Shares of Bank of China, the nation’s third largest lender dived 0.78 percent amid concern that a convertible bond sale will dilute shareholders’ stakes. Moreover, Aluminum Corporation of China plunged 2.21 percent on the back of lower metal prices, whilst China Petroleum dropped 1.64 percent as China launched Xinjian resource tax.

S&P/ASX 200 Index    4,381.00
Shares in Australia extended yesterday’s southern descent, leading the S&P/ASX 200 to plunge 32.10 points (0.73%) and close at 4,381.00. Eight out of the ten components tumbled on the day, with technology leading the way, down some 6.90 percent, while telecommunications advanced 2.73 percent to taper the decline. Shares of Insurance Australia slid 6.09 percent as the insurance stated that full-year profit margins will be lower than expected, while OneSteel lost 2.24 percent on the back of lower metal prices. Nonetheless, iSoft Group took a free fall of 30.36 percent as the company said “political uncertainty” in the run-up to the U.K. elections and subsequent change of government has affected its earnings outlook this year.

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

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