Fundamentals

U.S. Stocks Gain on Increased Earnings Forecasts

U.S. Session Key Developments

•    Home Sales, Leading Indicators Beat Expectations
•    Profit Forecasts Raised For Multiple Firms
•    Crude Oil Rallies To Eleven-Week High

U.S. stocks followed their European and Chinese counterparts higher, as better-than-expected home sales and improved earnings forecasts helped boost investor sentiment regarding the economic recovery.  The positive news sent stocks on the Dow Jones Industrial over 1 percent higher to 10322, while shares on the S&P 500 gained over 2 percent to 1093.  On the earnings side, companies ranging from United Parcel Service Inc. to AT&T Inc. improved their earnings outlooks as executives see growing demand from overseas.  Qualcomm shares, for example, rose 8.2 percent as the chipmaker said today that it expects higher profits and selling prices for its products this year.  As for the economic docket, home sales fell 5.1 percent in June to a 5.37 million annual rate, but this decline was better than the 9.9 percent decrease expected.  It was the second consecutive monthly decline for purchases, which may continue to struggle as the federal incentives to buy homes cease.  Also released today was the leading indicators, which declined 0.2 percent, less than the 0.3 percent drop expected.  Leading indicators, which point to the direction of the economy over the next 3-6 months, have declined in 2 of the past 3 months.

DJIA 30                         10,322.30                              +201.77                         +1.99%
The broad-based Dow Industrial Average rallied nearly 2 percent today, led by Boeing Co. which rallied over 5 percent to $66.  The Chicago-based planemaker announced that it won over 200 jetline orders worth nearly $30 billion at this week’s Farborough Air Show.  This was more than three times the number of orders announced in Paris a year ago and showed a huge rebound in demand.  Other firms posting large gains on the day included American Express, which rose 4.9 percent, and Du Pont, which added over 3 percent.

S&P 500                         1,093.67                               +24.08                           +2.25%
The S&P 500 posted its largest gain since July 7, as all ten of its index sectors closed in the black.  AT&T gained over 2 percent after announcing that its 2Q profits beat analyst estimates, while the KBW Bank Index rose nearly 4 percent on a positive quarterly profit release from Fifth Third.  Shares of Xerox and 3M Co. climbed 7 percent and 3 percent, respectively, after each company boosted its full-year revenue forecast.

NASDAQ                        2,245.89                             +58.56                           +2.68%
Shares on the tech-heavy Nasdaq posted the largest gain among major U.S. indices, as Microsoft announced fourth-quarter earnings that topped analyst estimates.  Furthering bullish momentum for the technology sector was Qualcomm, which added over 8 percent after raising its 2010 profit forecast and reporting better-than-expected third quarter sales.

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

Fundamentals

Global Equities Slump as U.S. Confidence Hits Eleven-Month Low

U.S. Session Key Developments

•    University of Michigan Consumer Confidence Falls to Lowest Level Since August 2009
•    Consumer Prices Decline in June for Third Consecutive Month
•    Japanese Yen Rises to a 2010 High Versus Greenback

U.S. stocks posted their worst day since June 29, following weakness in foreign markets and an unexpectedly poor consumer confidence reading from the University of Michigan.  The S&P 500 shed 2.8 percent to 1064, continuing the bearish momentum that began with a 2.8 percent plunge for Japan’s Nikkei 225 overnight.  The main catalyst for risk aversion during the U.S. session was the University of Michigan’s confidence indicator, which showed that consumer confidence unexpectedly fell from 76.0 to 66.5 in July, its lowest reading in eleven months.  The reading showed that a record-low share of Americans expect their incomes will rise in the next 12 months, making a strong rebound in consumer spending seem unlikely.

As for commodities, the risk sell-off led to a third consecutive decline in crude oil prices as well as declines in precious metals despite their “safe haven” qualities.  NYMEX Crude fell 0.9 percent to $75.87, while COMEX gold shed 1.3 percent and COMEX silver dropped 2.7 percent to close at $1192 and $17.85, respectively.  The U.S. Dollar Index, on the other hand, ended a three-day skid, while the Japanese Yen gained against all of its major cross-currencies.  U.S. Treasuries also rallied, as 10-year bond yields fell to 2.923 percent.

DJIA 30                         10,097.90                              -261.41                         -2.52%
The broad-based Dow Industrial Average fell for a second day as all thirty shares on the index closed in the red.  Bank of America plunged 9.1 percent to lead the descent, on news that the bank’s second quarter revenues fell short of analyst expectations.  Other stocks falling sharply on the Dow were American Express, General Electric, and Home Depot, which fell over 4 percent each.

S&P 500                         1,064.88                               -31.60                           -2.88%
The S&P 500 gave back all of its gains this week, as financials plunged 4 percent and industrial, basic materials, and consumer services dropped over 3 percent each.  Seventy-one of the largest seventy-two S&P companies by market cap closed lower, with Goldman Sachs being the lone exception after settling its pending SEC lawsuit after hours yesterday.  Overall, the S&P index is down 4.5 percent year-to-date.

NASDAQ                        2,179.05                             -70.03                           -3.11%
Shares on the tech-heavy Nasdaq posted the largest loss among major U.S. indices as technology shares declined over 3 percent.  Google plunged 6.9 percent after the internet search giant’s second quarter earnings missed analyst estimates, while Research in Motion, Cisco, and Dell dropped over 4 percent.

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

Fundamentals

Dour FOMC Growth Forecasts Reverse Crude Gains, Energy Traders Turn to Chinese GDP

North American Commodity Update

Commodities – Energy

Dour FOMC Growth Forecasts Reverse Crude Gains, Energy Traders Turn to Chinese GDP

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

A Spike in Volatility Doesn’t Leave a Lasting Impression on Gold Price Action

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

Fundamentals

U.S. Equities Reverse Morning Losses, Goldman Sachs Settles SEC Suit After Hours

U.S. Session Key Developments

•    Goldman Sachs Pays Record $550 Million to Settle SEC Suit
•    Financial Reform Regulation Passes Following 60-39 Senate Vote
•    Initial Jobless Claims Fall to Lowest Level Since August 2008

U.S. stocks managed to overcome weakness in Asia and Europe today, as the S&P 500 rallied to its highest closing level since June 21.  Initially, the index fell to 1080 as a better-than-expected jobless claims report failed to overcome weakness in foreign equities overnight.  The S&P then traded flat for most of the day until the bulls found their footing in the last 30 minutes, pushing the S&P to a 1096 close.  Overall, investors appeared more confident about the fate of the U.S. financial sector, as JPMorgan Chase beat its 2Q earnings estimates and financial regulation finally found the 60 votes needed to pass the Senate floor.  Although some analysts believe the financial reform bill could reduce bank profits, many realize that Wall Street avoided a “tougher” bill and the current bill’s passage provides clarity to investors.  Furthering bullish sentiment in financial shares, was a rumor that Goldman Sachs would be settling its SEC lawsuit with the U.S. government after trading closed.  Forty minutes after close, the SEC announced that Goldman agreed to pay a record $550 million and change its business practices to settle claims that it misled investors in collaterized debt obligations linked to subprime mortgages.  Goldman Sachs acknowledged it made a “mistake” and that marketing materials for certain financial instruments had “incomplete information.”

As for the economic docket, initial jobless claims fell to 429,000 in the week ended July 10, the lowest level since August 2008 and better than the expected reading of 438,000.  Continuing claims, on the other hand, rose to nearly 4.68 million in the week ended July 3, worse than the 4.44 million expected reading.  Also disappointing investors was a drop in Empire Manufacturing from 19.57 to 5.08 in July and a decline in the Philadelphia Fed Index from 8.0 to 5.1 in the same month.  Also released this morning were wholesale prices, which fell 0.5 percent in June, signaling a lack of inflationary pressures in the current economic environment.

DJIA 30                         10,359.31                              -7.41                         -0.07%
The broad-based Dow Industrial Average closed lower for the first time since July 2, as a 2.1 percent decline in Travelers and a 1.7 percent drop in Bank of America shares weighed on the index.  Overall, ten of the thirty index stocks closed in the red.

S&P 500                         1,096.48                               +1.31                           +0.12%
The S&P 500 was the lone major U.S. index to close higher today, thanks to strong gains for utilities and consumer services.  Nextera Energy and American Electric rose over 1 percent each to lead utilities, while Target shares rose 2.3 percent to boost consumer services.

NASDAQ                        2,249.08                             -0.76                           -0.03%
Shares on the tech-heavy Nasdaq dipped slightly lower on today’s session, although technology stocks closed up 0.03 percent.  Blackberry-maker Research in Motion gained over 1.4 percent to lead the major tech stocks, while shares of NetApp also added over 1 percent.

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

Fundamentals

US Crude Wins its First Positive Performance in Six Days as Equities Struggle to Keep Their Own Gains

North American Commodity Update

Commodities – Energy

US Crude Wins its First Positive Performance in Six Days as Equities Struggle to Keep Their Own Gains

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

Is Gold Reconnecting to Basic Risk Trends or is Confidence in Europe the Defining Factor in the Metal’s Strength?

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

Fundamentals

U.S. Equities Advance on Late Rally

U.S. Session Key Developments

•    Asian, European Shares Rally Sharply on Improved Sentiment
•    Precious Metals Decline as Gold Falls Below $1200
•    Dollar Index Falls to Lowest Level Since May 5

U.S. stocks rallied in afternoon trading to close higher, following Asian and European shares into the black.  Risk sentiment was strong despite a worse-than-expected ISM Non-Manufacturing reading, pushing the S&P 500 to 1028 at close.  The Institute of Supply Management’s index fell from 55.4 to a four-month low of 53.8 as orders slowed for a third month and employment dropped.  Investors shook off the news, however, as bullish sentiment in Europe and anticipation of second quarter earnings boosted equities.  Although there are no bluechip earnings releases this week, Alcoa, Google, Citigroup, and General Electric will all release 2Q numbers next week.

On the commodities front, crude oil traded slightly lower on the day, closing just below $72 a barrel level.  Gold, on the other hand, experienced a massive move to the downside, closing at $1195 on the COMEX.  Improved risk sentiment made the “safe haven” qualities of gold less appealing to investors, who also sold off the U.S. Dollar against its major cross currencies.  The Dollar Index fell for a fourth time in five days, declining to 84.083 at the time of this writing.

DJIA 30                         9,743.62                            +57.14                         +0.59%
The broad-based Dow Industrial Average posted the largest gain among major U.S. indices as 22 of its 30 bluechip stocks closed higher on the session.  Microsoft was the index leader, ralling over 2.3 percent, while aluminum giant Alcoa gained 2.1 percent.  On the downside, Home Depot fell 1.5 percent, while shares of Bank of America and Verizon declined over 0.7 percent each.

S&P 500                         1,028.06                               +5.48                           +0.54%
The S&P 500 rallied over 5 points as the utilities and energy sectors gained over 1 percent each.  American Electric led the rally in utilities, gaining 2.6 percent, while Entergy Corporation rose over 2 percent.  As for energy shares, Baker Hughes and FMC Technologies surged 3.8 percent each, while Halliburton closed 2.8 percent higher.

NASDAQ                        2,093.88                             +2.09                           +0.10%
Shares on the tech-heavy Nasdaq ticked slightly higher as technology stocks rallied 0.7 percent.  Oracle and Microsoft gained over 2 percent each, while shares of Intel rallied 1.5 percent.  Adobe Systems and Applied Materials fell over 1.4 percent each.

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

Fundamentals

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

Fundamentals

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.

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

Fundamentals

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.

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

Fundamentals

A Recovery for Stocks and the Euro Offers Speculative Footing for a Crude Advance

North American Commodity Update

Commodities – Energy

A Recovery for Stocks and the Euro Offers Speculative Footing for a Crude Advance

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

Gold Tests a Fresh Record High but Resists a New Bull Trend

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

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