oil

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.

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

oil

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.

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

oil

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).

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

oil

As Sentiment Trends Cool, Crude Traders Look for Guidance from Growth Prospects

North American Commodity Update

Commodities – Energy

As Sentiment Trends Cool, Crude Traders Look for Guidance from Growth Prospects

Crude Oil (LS NYMEX) -  $70.38   //  $0.34   //  0.49%

While the NYMEX-based crude contract would technically eke out a modest advance for the opening day of the week, the market has essentially passed the day unmoved. In fact, this benchmark energy product has been confined to congestion for the past week; the only difference between today and last week is that the level of volatility is dissipating. On the other hand, the investing masses are seemingly skeptical of this recent slump in activity as can be seen in the CBOE’s Crude Oil volatility index. Having retested an eight-month high of 47.0 percent, traders are still paying high premiums on options to protect against another dramatic change in the commodity’s price. Until this volatility is realized however, the masses will keep a constant vigilance on the speculative interests that underlie the capital markets. Feeding the risk appetite / aversion theme that has leveraged so much activity from the capital markets over the past month, the European Union’s questionable future was delivered a small jolt this morning when the Bank of Spain seized savings bank CajaSur as the firm moved closer to failure. While this would suggest a financial vulnerability for one of the EU’s larger member economies; the immediate threat would ultimately seem minimal as the local market benchmarks would weather the news with a relatively muted response.

Contrasting with the norm as of late, growth considerations would hold greater sway over crude Monday than the ever-volatile speculative cajoling that the threat of a financial crisis can encourage. Feeding demand forecasts early in the Asian session, investors were looking to the world’s second largest energy consumer (China) and its hesitancy in implementing growth and market cooling policy in the wake of the European Union’s troubles. For Japan, the outlook for economic activity was less optimistic according to the Cabinet Office’s economic outlook. The government maintained its assessment that the economy was “picking up steadily” from the previous month; but Finance Minister Kan would also remark that he would hold off on boosting his forecasts until after seeing the revisions for the first quarter GDP numbers to better assess whether stimulus and exports are putting in an unsustainable plug for the recovery. Rounding out consumption probabilities for the top three energy importers, crude traders would further enjoy an upgraded outlook for the United States. While the existing home sales data was questionable given the inventory glut; the Chicago Fed’s National Activity Index would point North with the best reading for the economy since December 2006. Furthermore, the National Association of Business Economics would release a survey that upgraded its forecast for growth this year to 3.2 percent from a 3.1 percent outlook just this past February. Is this round of news enough to substantially tip the scales of supply and demand going forward? Not likely.

Commodities – Metals

In the Absence of Speculative Volatility, Gold Falls Back on Structural and Sovereign Concerns

Spot Gold -  $1,94.95  //  $17.85  //  1.52%

The tempering of Gold’s two-month run to record highs seems to have found a point of equilibrium today. Having slipped over six-and-a-half percent from its record high through Friday, the precious metal put in for its first advance in four days. While this advance wasn’t particularly remarkable compared to recent volatility; it was notable given the relative lack of activity in other capital markets. Before the end-of-the-day sell off in the US session, equities were quiet and relatively unchanged. The same general conditions were notable in the broader commodity market and fixed income. However, gold would establish a clear bias and consistent tend. This was no doubt encouraged by lasting fundamental concerns over the structural and lasting troubles the global financial market face. Speculators may swing from risk adverse to insistent through minute changes in data; but the concern over sovereign fiscal health is a matter that shifts very little (sans major market changes like introduction of the EU’s rescue program) and will therefore maintain support for a larger trend. Speaking of the European situation, the Bank of Spain’s decision to take over CajaSur reminds the investment community and policy makers that the mere promise of assistance is not enough to return the region to health. In fact, savings banks in Spain have fallen on such hard times that the government has established a fund for the group that could total as much as 99 billion euros – the majority of which has not yet been funded.

Spot Silver  -  $17.95   //  $0.29  //  1.64%

Despite the late-session drop in equities and the strong performance from the US dollar through the New York session, silver would nevertheless advance for a second consecutive day. Normally, the precious metal – lacking the independent value of gold – will follow short-term speculative trends and maintain a positive correlation to equities and negative association to the US dollar (one of the preferred safe havens). However, Monday’s appreciation is not particularly incredible. On the whole, the capital markets were relatively stable through the most liquid part of the day; and this stability allowed the commodity to retrace some of the steep losses suffered through the second half of last week.

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

oil

Fears that a Financial Troubles Will Turn into Growth Problems Push Crude Briefly Below $70

North American Commodity Update

Commodities – Energy

Fears that a Financial Troubles Will Turn into Growth Problems Push Crude Briefly Below $70

Crude Oil (LS NYMEX) -  $69.89   //  -$1.72   //  -2.40%

When boiling the energy market down to the speculative tides of crowd behavior, explaining trends and volatility becomes far easier. However, rationalizing the current trend and pace of an asset isn’t the objective of the trader. Instead, a market participant’s intention is to ascertain where the market is most likely going to go in the future; and the path that it will take along the way. To project the current requires a mix of fundamental and speculative analysis. For crude, the outlook for economic activity has long run below the premium that current price would suggest; but it would take a catalyst to break the steady cycle of capital appreciation. However, since Greece’s troubles turned into a European Union crisis (which may further be developing global implications), the benchmark NYMEX crude futures contract has fallen nine of the past 10 active trading sessions and shed as much as 20 percent of its price from the 18-month highs set earlier this year. Over the months, there have been efforts to truly break the advancing trend that has colored this market since the March 2009 reversal; but all those previous attempts have fallen short. Why then is the current bear trend succeeding where previous slumps have failed? This time around, there is conviction in unwinding risky positions across all the major asset classes. The pressing concern now is that the EU situation is deteriorating to an inevitable flash point that could tip the world’s financial and credit markets back into turmoil. Yet, assessing the situation today, crude maintained its unfavorable trajectory while equities would recover from steep morning losses. From this divergence, we can better see the influence of fundamentals.

For equities, the promise of positive earnings has already triggered investors’ endorphins – leading some to believe that stocks will be able to outperform even in the absence of robust growth. Manufacturing and inventory building (and to a lesser extent business investment) are responsible for the positive quarterly income numbers for the first quarter. Absent was true consumer demand. Filling in for a dearth of spending from the economy’s largest sector is a temporary condition. But for commodities, the reality sinks in a little more quickly. Without the prospect of demand, production plans are scaled back and energy needs in turn pared. We have already seen these detrimental effects in the supply/demand balance for crude. The inventory figures measured by the US Department of Energy have increased 14 out of the past 15 weeks. This highlights another peculiarity though. The benchmark US crude futures contract is based on West Texas Instrument (WTI) which is stored in Cushing, Oklahoma. Recently, there has been an unusual build in the stockpiles of this particular grade, which has led to an unusual $5.57 premium in the UK’s Brent contract. This is an abnormality that will inevitably be reconciled as demand and supply functions level out (for better or worse).

Commodities – Metals

Investors Skeptical on Gold’s Steady Climb to Record Highs Without Another Catalyst

Spot Gold -  $1,228.50  //  -$4.68  //  -0.38%

Fundamental and trading conditions are always in flux. A good example of this truism in action is gold’s activity Monday. If we were following the same speculative template of the past two weeks, we would expect gold to have climbed to new record highs today as risk appetite extended its retracement through the morning hours of trade. However, where the benchmark S&P 500 stock index and EURUSD exchange rate were both plunging to new lows, the precious metal would spend the early hours little changed – and a reversal would actually take place well before the other assets began to recover. Why the divergence? Is gold no longer considered a viable alternative to currencies and other risky assets? This particular commodity maintains its role as a safe haven; but the simple correlation between asset and market condition starts to warp when record prices come into the picture. If we substituted gold for Treasuries, the concept of value would seem clearer. At a certain point, government debt would be considered expensive as investors start to measure the costs and probability of a correction in the asset classes value – which would invariably lead to losses in capital. The situation is the same for gold. Though it represents a meaningful alternative to equities, Treasuries and the US dollar; the commodity which yields no interest, has limited liquidity and is leveraged by speculators is far more susceptible to reversals. This is one concern that will not be easily overlooked.

Spot Silver  -  $18.94   //  -$0.40  //  -2.08%

No longer drawn in by the gravity of an aggressive move from gold, silver would defer to its normal fundamental backdrop of risky asset and dollar-based speculative instrument. However, despite both the dollar’s pullback and equities’ recovery, the metal would maintain most of its losses through the close of Monday’s session. The biggest decline in nearly two weeks has pulled silver well off its record highs and suggests there is excess premium built into this asset that straddles the two worlds (that of a precious metal versus an appeal of a speculative asset).

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

oil

Persistent Financial Crisis Concerns and Another Jump in Inventory Keeps Crude Grounded

North American Commodity Update

Commodities – Energy

Persistent Financial Crisis Concerns and Another Jump in Inventory Keeps Crude Grounded

Crude Oil (LS NYMEX) -  $82.50   //  $0.06   //  0.7%

Through the early morning (Asian and European sessions) of trading Wednesday, risk appetite was recovering from yesterday’s big hit. The capital markets and all assets with a connection to economic activity were racked Tuesday after rating agency Standard & Poor’s downgraded Greece’s sovereign credit rating to ‘junk’ status and stoked fears that troubles were spreading by further lowering Portugal’s own rating. Conditions in the European area are deteriorating; and officials’ sluggish response to providing only worsens the situation as the potential costs seem to outgrow the promises for aid. However, there is a sense of normalcy in this situation that has helped to prevent panic from spreading. While the problems in the European Union have certainly worsened, market participants have nonetheless grown used to the pain from Greece and officials’ efforts to put out the fire. This is a dangerous act of discounting a problem that could balloon into a global crisis; and crude as a speculative asset is not immune to this potential hazard. And, reminding traders that this situation is certainly progressing, the S&P announced in the early morning hours of the US session that Spain’s rating was downgraded. This had a prominent impact on the assets in Spain, Greece, Portugal, Ireland and all those EU members that are considered at risk; but the more traditional speculative assets (like crude) would either hold steady or recover lost ground. For the active NYMEX crude futures contract, congestion developed around the floor of a very prominent technical formation. With the US dollar (the pricing standard for the energy product) working to new yearly highs, there was an additional hurdle for a reversal.

Looking beyond the confusing sentiment scenario for the day, fundamentals would also provide a relatively mixed picture of supply-and-demand for the crude. At the top of energy traders’ calendar was the US Department of Energy’s inventory figures for the week ending April 23rd. Following the unexpected 5.34 million barrel surge in stockpiles reported by the American Petroleum Institute yesterday; the DoE’s bigger than expected 1.96 million barrel jump seemed relatively tame. Nonetheless, this was the 12th increase in 13 weeks and it would bring net holdings to a June high of 357.8 million barrels. Supply, at these levels, does not look like it will contribute to a push to $90 any time soon – even if refineries are operating at 89 percent capacity (its highest level since July 2008). What’s more, for the NYMEX’s benchmark West Texas Intermediate grade, the additional 1.3 percent increase in stockpiles in Cushing, Oklahoma (where it is generally stored) will further keep the American market’s depressed – leading to the now $3.00 premium for UK-based Brent over is US counterpart. On the other side of the equation, the spread of financial uncertainty threatens a still-nascent economic recovery. With the advanced reading of the United States’ first quarter GDP reading expected to cool from a 5.6 percent to 3.3 percent annualized pace on Friday and China actively working to cool its booming growth, there is a clear threat to the potential for expansion that can limit speculation’s influence.

Commodities – Metals

Safe Haven Capital Flows into Gold Taper as the Speculative Spirit Refuses to Yield

Spot Gold -  $1,172.65  //  $4.80  //  0.41%

The active gold futures contract on the COMEX was putting in for its fourth consecutive daily advance Wednesday – the most consistent advance from this particular asset since the period through December 3rd. The commodity’s strength was notable constrained by the correction in risk-based instruments following yesterday’s aggressive selloff; but the favored safe-haven would nonetheless keep its head above water. This buoyancy can be attributed to the metal’s role as a hedge not to specific region’s but rather government debt and currencies as a whole. Switching between Greek and German debt is a necessary evil when seeking safety and return; but even in an effort to isolate risk during another tremor in the Euro-area markets, there is still a clear impact on bund’s volatility. Looking to avoid inevitable troubles with government debt loads and currency volatility in the future, the precious metal is one of the few alternative stores of wealth that has a history of providing a haven. Today, another quake with an epicenter in the European region was felt when Standard & Poor’s kept the pressure on with a downgrade to Spain. While this particular member’s rating may be far from that of Greece’s, it is far larger and its weakness can have a far greater impact on the region. Going forward, the EU and IMF are likely to pass its 45 billion euro rescue package (perhaps even with an increase); and gold will likely lose some ground. However, it will only be a temporary reprieve for a much larger issues.

Spot Silver  -  $18.11   //  -$0.07  //  -0.36%

With the back in forth in underlying risk appetite trends and the US dollar, silver would find itself jostled by its fundamental moors. Through the early morning session, when risk appetite was trying to find its footing and the dollar was pulling back, the metal was holding stationary. However, by the time the dollar found its footing again and the risk-sensitive assets pulled back once again, silver would tumble. The Spain news would draw a sympathy bounce from Gold; but ultimately, this cheaper metal would end the day with its third bearish day.

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

oil

Breakout Momentum and a Delayed NFP Reaction Carries Crude to New Highs

North American Commodity Update

Commodities – Energy

Breakout Momentum and a Delayed NFP Reaction Carries Crude to New Highs

Crude Oil (LS NYMEX) -  $86.68 //  $1.81 //  2.13%

A strong open to the new week for capital markets after an extended holiday weekend would encourage a strong performance from crude oil. The third consecutive advance for this benchmark commodity has established remarkable momentum at fresh 17-month highs. Having surpassed the $84-level swing high last Thursday, there has been a notable interest among the speculative crowd to participate in this next leg of a larger bull trend. Looking at the delayed open interest on the benchmark NYMEX active futures contract, net positions rose 1.35 million contracts through Thursday – the highest level since March 18th (back when the gauge rose to a recent historical high). Today’s strength is no doubt sourced from the overall rebound in risk appetite. With most US market’s closed this past Friday for the US non-farm payrolls report, investors in the different asset classes had to play catch up. With only currency and bond traders online to trade the actual release, the initial response was one that encouraged interest rate forecasts, which subsequently boosted the dollar. However, the detrimental effect a higher currency would have on oil was overshadowed by the tentative gains in growth-related assets that would naturally develop alongside improved confidence in economic health. That being said, there was a notable limit to optimism in the Dow Jones Industrial Average. This is perhaps partly a side effect of a significant portion of the market still out for the holiday. If European shares help cycle the market even higher tomorrow, crude traders may soon see the $89.50 level that represents the mid-point of the 2008 to 2009 tumble that brought the commodity from record high to five-year low with the fallout from the worst financial crisis in generations.

So far, we have primarily assessed this past Friday’s employment data for its influence on risk appetite trends. However, the data has a substantial influence on expectations for overall economic activity. While the 162,000 jobs added to US payrolls may not provided much of a dent to the more than 8 million lost jobs over the previous two years, it is nonetheless seen as another milestone towards recovery for the world’s largest economy and energy consumer. Furthermore, an improvement in the health of the US economy is often interpreted as a leading sign of strength for the rest of the world. Adding to crude traders’ expectations of a recovery in consumer and factory-based demand for fuel, both the ISM service sector activity report and pending home sales data reported stronger than expected readings for their respective readings. Accounting for more than three-quarters of the business sector, service sector activity marked its best clip of expansion since May 2006. For the American consumer, the unexpected 8.2 percent jump in signed housing contracts for February offered a bearing towards recovery. However, this data could be skewed by the potential expiration of a government tax incentive this month. Looking out over the rest of this week, scheduled macro data will pick up; but central bank activity and interest rates activity will fight for control over price action.

Commodities – Metals

Gold’s Climb Steady but Lacking the Force that Oil has Established

Spot Gold -  $1,1126.55   //  $6.75 //  0.60%

Gold would advance for the third time in four days Monday thanks to a combined advance in risky positions and simultaneous easing of the US dollar. This precious metal has more often than not found its fundamental ties a point of contention in recent weeks. However, the development of a few of the more influential drivers has proved beneficial. The key to the day’s advance was the restraint of the US dollar. This past Friday, the benchmark currency would benefit from the lack of liquidity during the holiday period by responding to Friday’s non-farm payrolls as a sign that rate hikes were moving up the calendar (and the dollar would in turn find greater valuable against its liquid counterparts). As one of the favored hedges to the greenback, this news did not sit well with the gold bugs. However, with the start of the new weeks, investor sentiment would take over and a rise in risk appetite would temper the currency. Not only would the commodity gain as a hedge; but its own appeal as a speculative asset would also improve given the relatively ‘discounted’ levels it stands at compared to recent record highs. Moving forward, the push and pull between dollar hedge and speculative asset will continue. However, with the Fed holding a meeting, at which the discount rate is expected to come under debate, there is a chance that interest rate expectations could once again overwhelm the fundamental picture. As an interesting aside, delayed volume data on the active gold futures contract contracted through the market’s recent upswing. Furthermore, the CBOE’s Gold Volatility Index is just off an 8-month low at 18.1 percent.

Spot Silver  -  $18.01   //  $0.09  //  0.47%

Without a conflicting role as a safe haven asset, silver would turn dollar weakness and a rise in risk appetite into new two-and-a-half month highs. With spot now above the $18 mark, another milestone has been surpassed and it will be easier for bulls to carry on. However, the attachment to US currency and investor confidence often unequal parts exposes the metal to a significant level of volatility. Looking ahead to Tuesday, European markets will come back online and the Dow will once again look at 11,000 as a benchmark to surpass. On the other hand, with the Fed deliberating on whether or not to hike the discount rate, the greenback could in fact be ready to extend its rebound.

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

oil

Euro May Correct Further against US Dollar

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Euro / US Dollar

Failure to extend lower warns that a larger correction is underway in the EURUSD towards 13820-14030 as either a 2^nd or B wave.  Near term structure is unclear (which probably means in itself that a larger correction is indeed underway).  Sentiment readings such as COT also suggest near term Euro strength as speculators hold a record amount of Euro short positions.

British Pound / US Dollar

Either a triangle or flat is underway as a 4^th wave correction in the GBPUSD.   In the event of a flat, the pair would exceed 15386 slightly before reversing.

Australian Dollar / US Dollar

The rally from below 9000 is impulsive (5 waves), which suggests additional strength as long as the AUDUSD remains above 9127 (last week’s corrective low).  Measurements place objectives at 9363 and 9509 (100% and 161.8% extensions of the 8985-9221 advance).  However, beware that 21 day ATR is at its lowest since the July 2008 top.  This low level of volatility indicates complacency and the potential for a reversal.

New Zealand Dollar / US Dollar

No change: “The NZDUSD is marching to its own beat as a top may already be in place at 7185.  The decline from there is impulsive (5 waves), which reinforces the bearish bias.  I favor the downside against 7185.  A move through there would expose 7240.”

US Dollar / Japanese Yen

The USDJPY has traded to a fresh 2010 high and the larger trend is up but I do expect a pullback near term since a 5th wave rally from 8962 may be complete.  One reason to favor the 5^th wave interpretation rather than a 3^rd of a 3^rd wave interpretation is the divergence with momentum at the high on intraday charts.  3^rd waves tend to possess the strongest momentum, which is not the case right now.  9300 is initial support.

US Dollar / Canadian Dollar

The USDCAD has traded to fresh 2010 (and lowest since July 2008) lows and the next levels are potential support are near 9900.  9914 is the 61.8% extension of the 13068-10782 decline and 9892 is where the decline from 10307 (probably a 5^th wave) would equal the decline from 10784-10368 (1^st wave).

US Dollar / Swiss Franc

The USDCHF has broken below 10500 and parallel channel support, which negates the previously held bullish bias.  The next level of potential support is 10350 (100% extension of 10908-10504).

Gold

“Gold has traded sideways since December and appears to be building a bullish base.  Specifically, the base could be a complex head and shoulders (the head itself is a head and shoulders).”  A break above 1145 is needed in order to confirm the inverse head and shoulders pattern and propel the yellow metal to fresh highs.

Light Crude

Sights are now set on 90 and perhaps 100.  The rally from the January low may be wave 5 within an impulse from the 2008 low.  Bigger picture, the advance from the 2008 low is either a 1^st or A wave.  Following completion of this rally, larger wave 2 or B will unfold; bringing crude back to at least 70.

Jamie Saettele publishes Daily Technicals every weekday morning, COT analysis (published Friday evenings), technical analysis of currency crosses on Monday, Wednesday, and Friday (Euro and Yen crosses), and intraday trading strategy as market action dictates at the DailyFX Forum.  He is the author of Sentiment in the Forex Market.  Follow his intraday market commentary and trades at DailyFX Forex Stream.   Send requests to receive his reports via email to jsaettele@dailyfx.com.  Traders can meet me at the FXCM Expo in Las Vegas on May 3rd and 4th.  You can register to attend at www.fxcmexpo.com.

oil

A Steady Rise in US Spending and Drop for the Dollar Generates Crude’s Biggest Rally in 6 Weeks

North American Commodity Update

Commodities – Energy

A Steady Rise in US Spending and Drop for the Dollar Generates Crude’s Biggest Rally in 6 Weeks

Crude Oil (LS NYMEX) -  $82.26  //  $2.26  //  2.82%

The combination of a steady advance in investor sentiment, a retreat for the US dollar and a terrorist attack in Russia would encourage an advance from crude prices. And, proving that this was the correct combination of risk appetite and uncertainty needed to get the speculative crowd’s interest, Monday’s rally was the largest since February 16th (when the market was in the middle of a strong bull trend). However, there is a notable contrast between this impressive rally and the one staged back in the middle of February. This time around, the surge developed within a congestion zone that holds notably below $83 and the psychologically important $84 level. There are still momentum and fundamental hurdles to overcome before this market revives its long-term bull trend. Nonetheless, underlying the correct mixture of fundamental factors this morning was the steady climb in risk appetite. While a critical assessment of the market backdrop may fall short of encouraging a significant buildup in speculative positioning, consistent inflows of capital into specific asset classes (as can be seen in the steady climb in the Dow Jones Industrial Average) have helped to maintain a general bias in an otherwise flat market. From the Dow, a new 18-month high close on the day has kept bulls in control for another. A more active contributor to oil volatility today though was the tumble from the US dollar. Quickly curbing last week’s remarkable breakout, the depreciation in this pricing instrument has leveraged the alternative store of wealth function that this physical commodity has recently exuded. On the other hand, if oil’s strength were simply a factor of the US dollar’s weakness and rising risk appetite, crude priced in Australian dollars would see little to no advance. Yet, in fact, this measure would also appreciate significantly. On this point, we factor in the morning’s terror attack on the Moscow subway system. The uncertainty such events generate may not last long; but they can nevertheless be quite dramatic.

Accounting for those sentiment-based drivers behind crude’s appreciation, it is evident that they are still temporary. In contrast, the supply-and-demand updates are feeding into a larger rebalancing of fundamental interests. Raising the outlook for growth (and thereby the demand for energy to fuel said expansion), the US Commerce Department reported a fifth consecutive monthly increase in personal spending trends. In the scheme of supply-and-demand, a reduction in output is effective but it is consumption that holds the greatest sway over longer-term price trends. In other news, Japan reported its largest increase in retail spending in nearly 13 years while confidence in the health of the Euro Zone economy rose to a 22-month high. These may be small adjustments to global activity, but they are also more permanent. On the other side of the oil consumption gap, the outlook for this week’s Department of Energy inventory report is already calling for a ninth consecutive increase in stockpiles. Already set in the longest build since May with refinery capacity running at 81.1 percent, there is little long-term weight for balancing the market from the supply side anytime soon.

Commodities – Metals

Gold Advances for a Third Day but Gains Notably Smaller than Silver, Crude

Spot Gold -  $1,110.00   //  $2.50 //  0.22%

The same drivers that led the energy bloc and silver to significant rallies Monday were playing in gold’s favor as well. However, there was a notable contrast between the momentum that gold would set versus its counterparts. This distinction likely resides in the metal’s multiple fundamental roles in an otherwise complicated market backdrop. For leverage, the US dollar’s tumble was perhaps the most influential dynamic for price action. The benchmark currency not only retraced gains from last week; but it has pulled back to the point where the subsistence of a renewed bull trend has been cast into doubt. As one of the market’s favored dollar-alternatives (outside of other currencies), gold would stand to benefit substantially if the greenback lost conviction in an advance that has developed since the beginning of December. Another unique driver for the commodity Monday was the bombing of the Moscow subway system. The uncertainty this event provoked leveraged the metal’s historical role as a safe haven. Offsetting some of the “fear” premium the metal would otherwise have attained however, there was an appreciable improvement in confidence surrounding the health of Greece and the Euro Zone this morning. Following last week’s bailout plan accord, Greece announced a sale of 7-year government debt to raise 5 billion euros and start raising the necessary funds to roll over maturing obligations. Conditions seem calm for now in the Euro-area; but should the mere promise of a bailout prove insufficient, the fiat-hedge value of this commodity will quickly recover.

Spot Silver  -  $16.33   //  $0.44  //  2.58%

Silver enjoyed its largest single-day rally in nearly six weeks Monday thanks to the combined influence of appreciation in surface sentiment trends and a drop in the US dollar. The climb in equities (benchmarked by the Dow Jones Industrial Average) was the less significant driver. While the benchmark has maintained a steady appreciation these past few months, there is little in the way of momentum to support it and the building of enduring investment positions is giving way to more sensitive speculative trades. In contrast, the dollar’s stark reversal of a freshly renewed bull trend has caught a greater segment of the market unawares.

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

oil

Dollar Mixed as Aussie Soars

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Euro / US Dollar

I maintain that the EURUSD is headed lower in either larger wave 5 or wave 3 of 3.  Risk should be kept to 13573 and 13380-13405 is resistance.  I view 13000 as the next level that could produce a multi day bounce.  13390-13345 is potential short term support.

British Pound / US Dollar

“The extent of the decline from 15380 suggests that wave 4 is complete.  I favor a drop below 14780 over the next several weeks in a 5^th wave.  Similar to the EURUSD, a small 2^nd wave may be complete at 15118.”  Favor the downside against that level.  A move above there would suggest that a triangle or flat is underway since 14780.

Australian Dollar / US Dollar

Bigger picture – A diagonal can be counted as complete from 8800 and the break of 9090 inspires confidence in the downside.  The diagonal from 8800 may complete wave C of an A-B-C correction from just below 8600.  If this count is correct, then the entire advance (from 8600) will be retraced over the next several weeks.  However, the rally from below 9000 is impulsive (5 waves), which suggests additional strength.  9120-9100 is potential short term support.  The picture is mixed.

New Zealand Dollar / US Dollar

The drop below the short term support line indicates that a top may already be in place for the NZDUSD at 7185.  Further, the decline from that point is impulsive.  The rally from near 7000 has reached the 61.8% retracement so the NZDUSD should roll over from here if the larger trend has turned down.

US Dollar / Japanese Yen

The USDJPY move above 9217 and yearlong trendline resistance strongly suggests that the pair is headed above 9380 in what may be wave c of an a-b-c advance from 8481.  I’ll be looking for support to buy into next week.  Multi week targets for the c wave advance are 9710 and 10150-10270.

US Dollar / Canadian Dollar

The USDCAD is vulnerable at the current juncture.  A new low (below 10058) would complete 5 waves down from 10784.

US Dollar / Swiss Franc

No change: “I favor USD strength in a 5^th wave to a new high.  Price needs to remain above 10500 in order to keep the bullish count valid.  In other words, the USDCHF has gone about as far as it can go if the trend is up.”

Gold

“Gold has traded sideways since December and appears to be building a bullish base.  Specifically, the base could be a complex head and shoulders (the head itself is a head and shoulders).”  1075 is potential support.  Failure to hold 1175 would put the February low in jeopardy.  Notice that a head and shoulders top has just been confirmed as well.

Light Crude

After reversing from a gap several weeks ago, crude has stair-stepped lower.  I still favor weakness to at least 7750.  It is possible that the rally from the February low completes wave C of an A-B-C flat.  Exceeding 8350 would suggest that crude is headed higher for a test of 90.

Jamie Saettele publishes Daily Technicals every weekday morning, COT analysis (published Friday evenings), technical analysis of currency crosses on Monday, Wednesday, and Friday (Euro and Yen crosses), and intraday trading strategy as market action dictates at the DailyFX Forum.  He is the author of Sentiment in the Forex Market.  Follow his intraday market commentary and trades at DailyFX Forex Stream.   Send requests to receive his reports via email to jsaettele@dailyfx.com.  Traders can meet me at the FXCM Expo in Las Vegas on May 3rd and 4th.  You can register to attend at www.fxcmexpo.com.

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