Crude Oil (LS Nymex) -  $80.17  //   -$1.31   //  -1.61%

On a highly active trading session from both a fundamental and speculative perspective, crude put in for its worst performance in two weeks through the end of the New York trading session. For pace, Tuesday’s losses were similar in size to this past Friday’s response to the ever market moving NFPs. However, today’s performance carries more weight as the market is now testing the resiliency of a very prominent level of support in the form of $80. This level represented a significant buffer to gains for the past three months; so the market will not handle the retest lightly. However, it should be noted that the morning’s drop of as much as 2.7 percent has not definitely crossed the technical threshold as a range of congestion exits between $80 and $79. Will today’s fundamental drivers carry enough weight to usher the market down later or will we have to wait for another capable driver?

It may seem that today’s fundamental punch had its chance to mark a critical break; but the developments the market has tallied could continue to play out over the coming days and perhaps weeks. The most influential piece of event risk to cross the wires through the day was the conclusions to the Federal Reserve’s monetary policy meeting. While the central bank did not (it essentially cannot) lower its benchmark lending rate; it did further loosen the reins. Energy traders take note of two things: the fact that growth forecasts expectations were lowered and principal repayments on Fed held agency and MBS securities would be put into further government debt purchases. The former development is a clear break on energy demand as economic activity is now seen to be cooler going forward. However, it is important not to forget the speculative element behind the market. The bond purchases is another stimulus buffer which will support the capital markets with easy money and false-bred confidence. Therefore, we have a scenario where position traders are confront the short-term swing traders in determining what the net effect of this data will be. The conflict has not yet been decided.

Where the Fed’s decision had two means of interpretation, the other macro developments through the morning did not. The US Labor Department laid out the prospect of weaker growth well before the Fed by reporting US productivity fell on an annual basis for the first time since the end of 2008 (when the financial crisis had the markets in its grip). Furthermore, China reported in its trade figures that crude imports had dropped 15 percent to 18.8 million tons through July. Tomorrow, we will see additional updates on the actual supply and demand for this necessary commodity with US trade figures and Chinese industrial production. Also of import tomorrow is the weekly crude oil inventory figures. At this point though, demand considerations are far more important than supply.

Commodities – Metals

Spot Gold -  $1,202.75   //   $1.40  //   0.14%

In the early session hours of trade Tuesday, gold was deep in the red. A rally from the US dollar that seemed to defy fundamental considerations had a consequential influence over the bearing of the precious metal. In reality, the direction of gold was founded not on the currency’s performance but rather the same fundamental driver that it had taken its cues from. In the hours preceding the Federal Reserve’s rate announcement, investors lightening up on the speculation that the policy group would loosen its stimulus efforts after the Bank of Japan maintained its bearings. The net effect of this shift in conjecture was that the US was likely heading for a downgrade in growth expectations but not an equivalent response from monetary policy that would leave the world’s largest economy exposed to future economic and financial strains.

The actual outcome of the policy meeting was in line with what was seen as the lower probability event – that the Fed would both lower its growth assessment and further loosen stimulus. Alone, a cooling in growth could have pushed growth-dependent speculative markets to further losses. However, the additional suggestion that the central bank would turn capital invested in risky assets into government bonds was considered a sign that support of the markets would be expanded. Naturally, we would expect this to support equities and other capital return markets dependent markets; and it would. However, the gains from equities were limited; and so the influence on gold was not so clear. While promise of additional stimulus improves the safety net underneath the markets; it does not guarantee similar conditions as to what transpired in 2009. At this point, it is well known that stimulus alone cannot sustain expansion and the risk of a financial threat continues to grow despite this effort. This concern offers a meaningful boost to safe havens that can weather volatility in standard assets that amplify the swings in economic health.

Yet, the afternoon recovery cannot yet be qualified as the initiation of a new true bull wave. We are still well off record highs. What’s more, the activity readings behind the market are relatively mute. The volume on the active December futures contract on the Comex measured 91,369 in turnover – relatively modest in comparison to the past few weeks. Furthermore, we can see from the CBOE’s gold volatility index, that the first increase in expected activity stalled almost immediately. The indicator now stands at 18.2 percent.

Spot Silver  -  $18.34   //   $0.00   //   0.00%

Like most other speculative-driven assets, silver would carve a very volatile session. The metal was down as much as 2.1 percent through the morning hours before the US session caused waves. By the time the US session rolled around, risk aversion was already eating into the commodity;  but Fed stimulus would help bolster expectations of speculative interest.

Written by John Kicklighter, Strategist
To receive John’s reports via email or to submit Questions or Comments about an article; email jkicklighter@dailyfx.com

Written by Ilya Spivak and Sumit Roy, CFDTrading.com

Crude Oil (LS NYMEX) -  $76.84  //   -$0.31   //  -0.40%

Through the end of the US session, NYMEX-based crude would settle the day little changed. If we were simply examining the day-to-day close, it would seem that the day was relatively quiet. A look to the CBOE’s Crude Oil Volatility gauge would second this assessment as it hovers near its lowest level of implied activity in two months (33.2 percent). However, mute activity does not correspond to the fundamental activity on the day. In fact, an intraday chart offers a picture of high volatility with a dramatic 2.3 percent rally through the opening hours of New York floor trading. After briefly trading above $78/barrel around mid-day (the highest level for the market in two weeks), bullish convictions would fall apart; and the commodity would reverse course. It is worth nothing that most of the day’s selling pressure (resulting in a $0.60 drop) would occur over the span of 10 minutes. Given the timing of the move, it was clear that a particular catalyst was responsible for the drive.

Through the morning hours of the US trading session, the brief rally to new highs was spurred by a mild advance in sentiment and a bullish surprise from the Department of Energy’s (DoE) weekly inventory figures. Feeding risk appetite initially was the follow through on the previous day’s strong upswing and the news that another round of European government debt auctions met some level of success. A mild sense of hesitation would start to sway speculative buying, however, after the US government reported retail sales through June had dropped 0.5 percent. That being said, the surprise 5.1 million barrel drop in crude oil inventories was impressive enough to shift the supply/demand equilibrium behind price. Considering this sharp reduction followed a similar sized withdrawal the week price, this reading was remarkable enough to offset the fact that total holdings of the precious commodity are still near a record high for the season. Heading into the final hours of the active trading day, few energy traders were likely expecting a remarkable reaction to the FOMC minutes from the last rate decision. However, a downgrade on the range for growth expectations in 2010 and 2011 along with a warning for “some risk of deflation” would spur a steep decline as the reality of a cooler outlook for global growth tempers energy consumption forecasts.

Looking ahead to the next 24 hours of trade, the economic activity theme will carry over to another day with the release of an important round of Chinese data. The world’s second largest energy producer is expected to print a slip in second quarter growth alongside June readings for industrial production and retails sales. For market-moving impact, the GDP reading will be the top release. The annual pace of activity is expected to cool from the previous three months 11.9 percent pace to a 10.5 percent clip. What will it mean for the other major economic players (the UK will release data next week and the US the week after) if the leader of the global recovery starts to pull off its pace? For futures traders, it should also be noted that the August 2010 Brent Oil crude contract expires tomorrow; and the market will roll out to the next liquid contract. The NYMEX rollover will occur on Friday.

Commodities – Metals

Spot Gold -  $1,209.65   //   -$2.70   //   -0.20%

With risk appetite easing off its pace; the traditional capital asset classes were struggling for direction. For gold, the traditional drivers do not apply. However, the preferred safe haven for portfolio managers and those looking to avoid currency volatility would still end the day much like its speculative counterparts. This is somewhat unusual considering there was another wave of uncertainty coming out of the European financial system – the primary source of fear for the markets at large. A silver lining in a round of government debt auctions seemed to overwhelm concern related to the trouble that Spain is facing. Testing the market, Portugal would sell 877 million euros worth of debt at a much higher rate; Italy would 6.76 billion euros on instruments tuned to meet the best supply/yield combination; and Germany easily covered its 4.3 billion euro sale. It seems that both core and periphery EU economies are able to tap the capital market for funds (but the cost is certainly rising up). Not drawing enough respect though is the fact that the Bank of Spain reported the nation’s banks tapped the ECB for 126 billion euro sin loans through the month of June. This is one-quarter of the total asked by the region and is a clear sign that this particular economy is facing serious trouble. Nonetheless, the reaction to this news would prove tepid.

Yet, despite the lack of reaction to the financial uncertainty for the day; the precious metal was not without its remarkable moments. Around mid-day during the US trading hours, gold rallied 0.8 percent in a matter of minutes and would shortly after tumble 1.3 percent to completely reverse the swing. Where did this strength come from? It is highly probable that this remarkable move was simply a speculative or operational move in the market. According to the CBOE’s volatility index for gold, expectations for activity are at the lowest level since April 23rd; and aggregate volume on US futures is holding at depressed levels. A large order on either side of the market can have a greater impact on price action under these conditions.

What is further interesting is the lack of response to the FOMC’s minutes. Though the policy group did not change the benchmark lending rate, they did lower their expectations for growth and inflation. A lack of growth is a predecessor to a drop in investment for traditional asset classes; while a lack of price pressures diminishes the need for an inflation hedge (another of the metal’s roles). We will see whether the Chinese 2Q GDP figures can add to the fundamental picture.

Spot Silver  -  $18.35   //  $0.11   //   0.58%

Silver was following the tempered pace of risk appetite through the early hours of Wednesday’s trading session; but the metal would not move in lockstep with equities or gold as the day progressed. Instead, the commodity would follow the path that the industrial metals would set out. If this relationship holds, China’s GDP release could invite a significant boost in volatility in the hours ahead.

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

Crude Oil (LS NYMEX) -  $72.20  //  $0.06   //  0.08%

There was a dramatic swing in risk appetite trends through the day Tuesday; and crude would stick to its speculative interest while it tracked out the volatility. Through the Asian and European sessions, optimism would find remarkable momentum that quickly spread to most speculative asset classes. For equities, the buying pressure would lead to a near-three percent rally for the benchmark European indexes. Electronic trading on the US oil futures market would match this optimism and push the asset to a meaningful break from the aggressive bear trend that has been in place since the market reversed from the eight-week high set back on June 28th. However, this positive break wouldn’t maintain momentum as the rally quickly faded, eventually pushing crude back to the same level that it would open the day. Much of this late-session reversal can be traced back to risk appetite itself. Initially playing catch up to their European counterparts, US equities stalled well before hitting similar performance levels and briefly traded underwater towards the latter half of the day. Considering this is the first day of full liquidity for the global markets, it is difficult to suggest that either the morning rally or subsequent reversal is the true measure of sentiment. Time will tell.

Another contributing factor to oil’s poor performance during New York trading hours was the worst-than-expected reading from the ISM’s service sector activity report. While it may be easier to reconcile the link between factory activity and energy demand, the service report is in some ways a better gauge for defining supply and demand expectations. For the world’s largest economy, the service industry accounts for a vast majority and overwhelming proportion of output. This is reason enough for energy prices to slip with the first decline from this series in seven months along with a slip in new orders (six month low) and employment (pulling back from its highest level since December of 2007). For fundamental guidance over the coming 24 hours, German factory orders and Canadian business activity will not likely rouse a similar level of volatility.

Measuring speculative interests behind the market, this past Friday’s Commitment of Traders reading from the CFTC reported a modest 6 percent drop in net long interest to 37,120 contracts through the week ending June 29th. Net open interest held at its lowest level since the beginning of the year at 1.26 million contracts. On a shorter-term basis, volume on the active August NYMEX futures contract measured 296,000 contracts, well off of the high set this past Thursday on the break below $75. Also noteworthy was the increased difference between the nearby and two-year deferred contracts to $7.05 (the widest since June 22nd).

Commodities – Metals

Spot Gold -  $1,193.05   //   -$16.22   //   -1.34%

Is gold reforming its direct links to risk appetite trends? With today’s dramatic rally in equities through the European session (and the lesser advance during the morning hours of the New York hours), the precious metal slipped beneath a meaningful technical support (a 38.2 percent Fibonacci retracement level) and subsequently dove to fresh six week lows. That would seem to match to the intensity of an approximately three-percent rally for the benchmark European indexes given the two assets classes’ usual, negative correlation. However, it may be too early to label gold a perfect hedge for equities once again. If that were the case, then last Thursday’s sharp bearish breakout for metal and stocks would complicate this fundamental convergence. Instead, it is more likely the case that we are looking at a unique case where a particularly interest factor of this sentiment swing is appealing to gold’s ‘alternative-investment’ role. No doubt contributing to today’s bullish efforts during the European session was the news that Spain had successfully tapped the debt markets and the ECB found more than enough bid for its weekly tender to absorb liquidity from its government bond purchases. Considering the Euro-area’s descent into a potential financial crisis has been the source of so much uncertainty recently, its potential recovery is a means for drawing capital back into the currency market and traditional asset classes.

Whether or not the correlation between equities and gold holds (as well as gauging the direction of the precious metal will take going forward) is rooted to the question of whether the financial system in Europe is in fact improving. It is true that the perception of the region’s health has indeed brightened; but sovereign entities ability to assess the debt markets and banks’ ability to withstand viscous credit markets has shown little meaningful and lasting improvement. So, while Spain and Austria may have successfully sold debt on the market and the weekly rollover from the ECB to cover the central bank’s purchase of government debt was more than covered; there is still a long way to go before bad debt is fully worked off and member economies are able to pay off their liabilities. This means sentiment could carry confidence further and drag gold down along with it; but eventually, the true condition of the region could once again bolster the metal’s appeal as an alternative asset.

Monitoring the divergence between short-term and long-term trends, we can see another reason for gold’s correction. The COT report reveals net long speculative interest on COMEX-based gold futures rose to its highest level this year (244,725) just this past week. The record high set in November is not much higher. As for daily turnover, the volume on the active futures contract is still relatively low at 137,000 contracts compared to this past Thursday’s 258,000 when the commodity issued a serious bearish break.

Spot Silver  -  $17.84   //  $0.03   //   0.14%

Despite the remarkable performance from equities and the seemingly risk-based move from gold, silver put in for a relatively restrained performance Tuesday. The sessions range was well below the average and a virtually unchanged daily performance offered little in the way of progress. It seems last week’s massive bearish break will not easily revive a trend.

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

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

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

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

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

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

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

Crude Oil (LS NYMEX) -  $75.80  //  $1.42   //  1.91%

Risk appetite accelerated through Thursday’s active trading sessions; and naturally, the speculative appeal of crude would lead to impressive gains up through the active US session. Taking stock of the commodity’s performance on the day, the active NYMEX futures contract climbed for a fourth consecutive day. Interestingly enough, we haven’t seen such a consistent performance since the end of April just before the market collapsed 26 percent. Drawing a direct contrast between this week’s rally and the ‘last gasp’ move in April is something of a stretch. Both would come after a period of congestion and would set new relative highs; but the speculative burden on the market is currently much lower than it was two months ago. Furthermore, the threat of other capital markets triggering a cascade of sell orders is much lower now than it was back then. For comparison, the Dow Jones Industrial Average climbed nearly 3 percent through exchange hours and subsequently overtook the psychologically important 10,000 level. Furthermore, the barometer for fundamental concern in the FX market (EURUSD) has climbed back up to its historical midpoint – a level which was breeched this past Friday and generated significant bearish concern.

Feeding a general strength in risk appetite through Thursday’s session were a number of key economic indicators and events that would leverage the a nascent reversal in speculative interests. At the forefront of every trader’s mind is the possibility of a global financial crisis developing in the coming months. This treat of this happening was significantly diminished with the ECB’s monetary policy meeting. The focus of disaster theorists the world over, the Eurozone has become the epicenter for all financial ripples through the system. However, far from worries that Greece is on the verge of default; ECB President Trichet announced that the policy authority would continue to support the region’s members and its collective money markets by vowing to continue his purchase of government bonds while simultaneously announcing three unlimited lending facilities to banks (one in July, August and September). What’s more, the European Union would build on the optimism that was established with the ECB’s support when the group’s President suggested they would further expand the 750 billion euro financial rescue plan that had been passed should it seem the original size would not be sufficient. From speculative interest to true supply/demand considerations, Japan’s economy grew faster than expected in its final 1Q GDP reading. The world’s second largest economy grew at its fastest pace in a decade when adjusted for inflation. What’s more, China would confirm the strength of May data, thought the actual levels would fall somewhat short of the optimistic figures suggested yesterday.

Turning to the futures market to assess the quality of oil’s rally; the CBOE volatility gauge finally broke the trend of a steady rise in risk premiums that has been in place since late April. The measure – used to gauge the potential change in prices over the coming 30 days – slipped to 39 percent. Alternatively, the volume on the active futures contract extended its steady decline through the US session despite the market’s momentum and the new, near-month high through the day. Nonetheless, the price premium for the July 2012 over the current contract slipped to $8.73 from $9.81 yesterday and the supply-side concern with the US-based WTI contract is fully reversed with the active Brent crude contract trading at a $0.20 to its US counterpart – the biggest positive gap in two months.

Commodities – Metals

Spot Gold -  $1,217.06   //   -$16.44   //   -1.33%

Slipping for a third consecutive day from the intraday record high set this past Tuesday, gold is slowly bleeding some of the premium it had built up as a safe haven and alternative store of wealth. The influence from risk appetite was obvious. Growth-linked securities surged through the day with a particularly strong performance from the Dow Jones Industrial Average (which would close well over the 10,000 hurdle) and commodity currencies (which rallied well over two percent against a range of counterparts). However, this precious metal is not the traditional safe haven in the risk spectrum. Rather, gold is considered the primary harbor for capital looking to avoid the ravages to the financial system that could be caused by sovereign downgrades and default. On this front, we would see a market improvement in the speculative weather. The most remarkable upturn would come through the collective effort of European policy officials. ECB President Trichet offered open ended support for the region’s markets and economies with a vow to continue purchasing government debt and the announcement of three additional liquidity facilities over the coming months. These seems a direct answer to the record levels of overnight deposits that have found their way onto the central bank’s books and the financing troubles that some EU members have found themselves in. Another crisis seemingly averted (though in reality it has just been deferred) was the worry that Chinese markets were on the verge of collapsing under their own weight. The confirmation of May’s economic data gives enough fundamental support for the premium build up to buy doubt that it is not sustainable. Volume and open interest are still exceedingly low (which they have been through this most recent effort to forge new highs). This could present a shift in interest to the physical side; but costs and extended ETF holdings suggest the transition is not likely that dramatic.

Spot Silver  -  $18.22   //  $0.08   //  0.44%

Despite the impressive rally from risk-related assets and the subsequent tumble in the US dollar, silver’s performance today was somewhat remarkable. Volatility was greater than the previous two days; but its performance would not offer a clear direction. Though a speculative asset at its heart, there is no doubt interest behind this metal that was established as a cheaper alternative to pricy gold as a safe haven asset class. If this dichotomous alliance holds, expect congestion to persist.

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

Crude Oil (LS NYMEX) -  $72.22  //  $0.78   //  1.09%

Looking across the speculative markets Tuesday, risk appetite was visibly recovering the composure it had lost following the warnings of a Hungarian default and the questionable NFP data from this past Friday. Gauging the bearing and intensity of speculative sentiment, the Dow Jones Industrial Average climbed 1.26 percent while EURUSD advanced a more manageable 0.4 percent.  However, both of these advances would fall short of the respective milestones the benchmarks had slipped below over the past few active trading sessions. The same general assessment can be applied to the active WTI crude futures contract which has not significantly retraced Friday’s losses nor has it been able to recover from the break of the long-term rising trend channel back on May 13th. This restrained recovery can be interpreted as evidence that sentiment has not materially improved – rather the progress made against risk aversion through today’s session is a sign of moderation. That is a necessary adjustment given the lack of progress crude has made in the past month while the CBOE’s Oil volatility index hovers not far from its 10-month high (now at 44 percent).

For fundamental guidance through today’s session, the macro docket would further encourage the mild optimism that would ultimately play out. Improving growth – and thereby energy demand – forecasts, the Fed Chairman Ben Bernanke remarked that the United States recovery was intact and was “moderate paced.”  Encouraging growth projections through financial stability, the European Union would have a relatively quiet day. In fact, the Hungarian government’s vow to do what was necessary to rein its deficit in, the agreement by the European Financial Stability Facility on how to raise the 440 billon euros expected through its rescue program and a report that showed Germany’s industrial sector was expanding at its fastest clip since at least 1992 has notably improved the situation. Alternatively, the US Energy Department’s Short-Term Energy Outlook lowered projections for day consumption in the world’s largest petroleum importer from 85.55 million barrels to 85.51 million. As for price, the group markedly reduced its average 2010 price from $82.18 set last month to $78.75. A lesser contributor to price at this juncture is supply levels. The American Petroleum Institute released its weekly inventory figures for the week ending June 4th after today’s close. According to the industry group, oil stockpiles fell 4.54 million barrels through the period – the biggest contraction in six months. Tomorrow’s DoE figures are also expected to record a drop; but at 900,000 barrels, it would be of a much smaller magnitude. Something longer term to consider, forecasts for an active hurricane season for the Gulf of Mexico could help close the supply/demand gap if realized.

For deeper analysis, astute energy trades continue to measure the relative performance of the benchmark US energy contract. The July 2010 West Texas Intermediate contract is still trading at a $0.89 discount to its UK Brent counterpart. This is shows an expansionary trend after the spread narrowed to as little as $0.05 on May 28th (the closest to a flip in the WTI contracts favor in two months). Furthermore, the premium paid for the contract expiring in two years stands at $9.35 over the active nearby – the largest spread since December 2008.

Commodities – Metals

Spot Gold -  $1,236.95  //  -$3.30  //  -0.27%

Spot gold would rally intraday to a new record high $1,252.11 / oz Tuesday. However, where the commodity would hold on to its new record through the close when priced in other currencies (such as the British pound); against the benchmark dollar, the  precious metal would ultimately stall at the swing high set in the second week of May. Given the long-term bearing on this commodity and the impressive momentum through the past two active sessions, this may only be a temporary boundary. Nonetheless, the stalled progress through today’s session would speak to gold’s dependence on its primary fundamental drive: risk appetite. Traditional speculative interests had certainly perked up through the day with a respective bounce from US shares and subsequent dip from the safe haven US dollar. More interesting for gold bugs though was the lack of progress in the European Union’s deterioration. Spain’s public sector would strike and estimates for the capital the nation’s banks would have to raise rose; but these were hardly of the caliber of shift that speculators needed to trade on. Attempting to step in as an alternative, Fitch’s warning that the United Kingdom would have to do much more than the April budget called for to maintain its top credit rating is a write off given the new government’s vows to materially cut spending and its shortfall. At this point, we are merely waiting for the next remarkable shift in market performance or economic activity to see whether gold can surpass the $1,250 level with conviction. In the meantime, aggregate open interest for the US exchange-traded gold futures contract has dropped significantly while open interest has moderates from its mid-May high. This could be a sign that investors are simply moving into the physical; but at this level, the benefit of entering through futures more cost effect.

Spot Silver  -  $18.28   //  $0.11  //  0.61%

Just as gold would decelerate from its Monday rally, silver was looking at a far more tame bullish performance through today’s active US trading session. Spot silver topped below last week’s swing high; offering bolstering speculators doubts that further appreciation is guaranteed on a purely momentum basis. The restrained advance was supported by the performance equities would put in for (through its risk connections); but the relative stability of the US dollar (its primary pricing instrument) would ensure relative stability. Looking at delayed futures activity data, volume surged to a two-week high this past Friday as the metal tumbled. Open interest on the other hand slipped and is generally well off May’s highs (which coincide to the peak in prices).

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

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