Contributed By: DailyFx

North American Commodity Update

Commodities - Energy

Speculative Strength Finally Succumbs to Reality as Crude Breaks Bull Trend

Crude Oil (LS Nymex) - $82.34 // -$2.52 // -2.97%

In the past two and a half months, oil has climbed approximately $16 - or 22 percent. While some energy bulls may try to attribute this advance to growth projections that feed into boosting the market’s expectations for demand; such an explanation is self-serving. It isn’t a coincidence that oil was advancing through the same period that equities rose and the dollar tumbled. Rather than following the outlook for economic activity, traders were content with tracking risk appetite trends to drive their oil trades to capital gains. However, that correlation works both ways. At the same time the S&P 500 marked a critical reversal on its bullish trend from the beginning of September, US crude would mark a reversal of similar magnitude in its drop below $84.50. Having faced its first series of three-consecutive daily declines since September 17th, the possibility of a temporary correction is high; but the likelihood of a return to the previous bull wave is much lower.

Looking at the catalyst for today’s oil move, we have to broaden our horizons beyond the workings of the energy market. Looking at the S&P 500, the US 10-year Treasury note and other benchmarks for the important assets classes; we see the same tumble. Cross-market correlations at this level of intensity and that occur alongside meaningful technical developments are almost always founded on investment-wide fundamental themes. The theme Tuesday was the collapse of risk appetite under its own weight. While we can say that the troubles with (and lack of progress in correcting) Ireland’s financial troubles was the spark, the pressure has been building for a while behind cooling growth trends, efforts to curb capital market expansion in emerging markets and growing financial instability between stimulus and anemic capital flows. Adding to selling pressure was the sustained advance from the dollar. Maintaining a negative correlation to risk trends; it is also the primary pricing instrument for US oil.

Concentrating on the more tangible fundamental health of the oil market, today’s data would offer a mixed picture of value. Chinese fixed direct investment grew 7.9 percent in the year through October and the Leading Indicators index advanced to 71 percent. The implications for energy demand were somewhat offset by comments made by the Premier that his cabinet was drafting anti-inflation measures. In other news, US factory was unchanged through October; while German investors outlook for growth finally pulled up.

Energy traders should take note that the API reported crude inventories through last week plunged 7.652 million barrels – the biggest drop since September 2008; which could translate into a drawdown on tomorrow’s DoE figures. Trading volume was up 22 percent from Monday; but still below last week’s highs. Also, open interest is shifting from the December to January contract.


Commodities - Metals

A Critical Break for Gold’s Bull Trend Founded on Margin Hike and Tempered Inflation

Spot Gold - $1,338.40 // -$30.10 // -2.20%

It may not seem unusual to see gold tumbling through Tuesday’s session since nearly every risk-sensitive asset class was diving. However, the precious metal still represents a favored safe haven asset and alternative to more traditional securities. And, despite a recent shift to a positive correlation to risk trends, today’s hand-in-hand move is still remarkable given the severity of the development. While the 2.2 percent decline through the close wasn’t’ as severe as Friday’s correction; the session’s performance was perhaps more meaningful. That is because with Tuesday’s close, spot gold has finally broken through the floor of a rising trend channel that has guided the commodity higher since the end of July. A nearly four-month trend has been called to a technical and tentative end; but how readily will the market jump in to unwind their long gold holdings? That is a question of fundamentals.

Looking at the precious metal’s performance Tuesday, we can simply attribute the commodity’s direction to the recent positive correlation established between traditional speculative assets and the metal. There is certainly an element of buying here simply to take advantage of the potential capital gains. However, beyond that, we see a very clear weight levied on the gold in the former of a margin increase. The Chicago Mercantile Exchange (the primary futures exchange for gold trading in the US) decided to replicate its efforts to curb silver, cotton, soybeans and other commodities by increasing required margin on trading the precious metal 5.9 percent to $4,500 per contract. This naturally reduces participation by speculators as it increases the cost of trading.

Yet, looking beyond this structural change in market conditions, there will be a more nuanced balance for the direction gold takes going forward. On the one hand, we have the threat that troubles with keeping the Greece bailout program financed by all EU participants and Irish financial troubles evolving into a European crisis leveraging the value of gold as an alternative to currencies and those assets whose values are determined by those fiat promises of value. Alternatively, we have policy officials stating clearly that there is little threat of inflation going forward (one of the positive price elements of gold). The Fed’s Dudley rebutted an op-ed letter calling on the central bank to withdrawal stimulus by saying officials could hike rates to contain inflation at any time. BoE Governor King talked down inflation threats through the medium-term – though short-term they could spike. And, China is reportedly working toward anti-inflation measures.

For trading statistics, volume on the CME’s December futures contract surged 40 percent to 279,735 but this wasn’t as high as the turnover from just this past Friday. In the meantime, speculative interest in ETF exposure is still level at 67.13 million ounces.

Spot Silver - $25.48 // $0.00 // 0.00%

Silver was still within its broader retracement pattern through Tuesday’s close; but the metal wouldn’t make any progress besides setting a new intraday, two-week low. It is particularly remarkable that the commodity was otherwise stable through the session considering the CME decided to hike margin for a second time in a week by 12 percent to $7250 per contract. Speculative interest is deeply rooted here – a fact made tangible through the record high ETF holdings through the day (476.754 million ounces).

Contributed By: DailyFx

* Dollar Rally Fortified by Crucial Reversal in S&P 500, Risk Appetite
* Euro’s Future Even More Murky after Ireland Resists Financial Aid, Greek Support Falls Apart
* British Pound Helped by High CPI Reading, Hindered by BoE Reiteration for No Hikes
* Australian Dollar Remains Preoccupied with Rates, Risk as Growth Forecast Indicator Stagnates
* New Zealand Dollar Will Find Little Trading Impetus in Upstream 3Q Inflation Figures

Dollar Rally Fortified by Crucial Reversal in S&P 500, Risk Appetite

For the dollar, the critical technical breakout happened Monday. To start the week, the trade-weighted Dollar Index overtook a month-long range top; while the FX market’s most liquid currency (EURUSD) put in for a confirmation of this past Friday’s lows. However, for gauging conviction and trend, Tuesday’s price action was far more significant for validating a singular outlook across the market. From a purely price action standpoint, the session would lead the Dollar Index to a necessary break of resistance that was rendered meaningful by the confluence of a prominent trendline, Fibonacci retracement and 50-day simple moving average. And, in the meantime, it would mark a fresh seven-week high. From the liquid majors, we would finally see participation in the dollar rally that extended beyond the early reversal patterns from EURUSD and USDJPY. GBPUSD finally dropped below 1.5950, USDCHF has moved up to a near-two-month high just below parity, USDCAD surged higher and AUDUSD fell for the sixth time in seven active trading days. Though, all of this taken into account, the most meaningful development for the dollar was the S&P 500’s decisive break from a two-and-a-half month rising trend.

Between technical and fundamental progress for the greenback, the latter has greater pull when it comes to establishing a trend. With the break of the benchmark equity indexes this past trading session, we have seen a meaningful shift in power. Many may say it is simply a line that was breached; but that simple pattern is especially meaningful to a market that is heavily populated by speculative traders (versus passive investors). With this changing of the guard, investors will lose the straightforward investment of low-yield funds into otherwise risky assets that have produced consistent and quick capital gains over the past few months. We could attribute this reversal in the crowd’s sentiment to Europe’s troubles – Ireland may very well have exacerbated financial concerns surrounding the entire region by brushing off calls to ask for financial support. However, pressure has been building against sentiment for some time now. We should remember that growth has shown signs of moderating across the globe, speculative-favorite China has taken clear steps towards cooling its economy, policymakers have been given a green light to curb the influx of ‘hot capital’ into their economies and true rates of return (yields, dividends) have not shown meaningful growth. All of this plays towards uncertainty and the dollar’s role as a harbor from unpredictability in its liquid and liberally-supported market.

For more domestic concerns, the op-ed letter written by market participants demanding the Fed not follow through with the second round of its stimulus program was refuted by central banker Dudley. He remarked that inflation concerns were overstated as the policy authority could easily hike rates while maintaining its unorthodox programs. In the meantime, there are early rumblings amongst politicians to redefine the Fed’s dual mandate to a singular focus on inflation. Keeping the focus on policy, the PPI data would add little to the interest rate argument – event at 4.3 percent annual growth. The CPI data due tomorrow will be more focused; but less influential. Other data highlights included the record selling of Agency Debt by foreign central banks in the TIC data and tomorrow’s housing starts figures.

Euro’s Future Even More Murky after Ireland Resists Financial Aid, Greek Support Falls Apart

Despite a clear deterioration in the market’s perception of Ireland’s financial health, officials refused to seek aid from the EU through the EFSF rescue program. For some, this is a promising development; because country is avoiding greater debt obligations to pay off later down the line – as both the Prime Minister and Finance Ministers have said, the government is fully funded through the middle of 2011. On the other hand, speculative fears are rarely soothed by politicians’ self-severing reassurances. To many, Ireland’s opposition to asking for support at the monthly EU meeting is a step that merely pushes the country and region deeper into a crisis of confidence. While the nation’s government may be fully funded for the next six to eight months, its banking system is very clearly struggling. Irish banks accounted for 20 percent of the ECB’s loans in October; and that lending was equivalent to 80 percent of Irish GPD. Ignoring this issue clearly doesn’t make it go away.

In addition to Ireland’s troubles, financial troubles continue to pop up in other corners of the market. Following the EU’s revision of Greece’s 2009 deficit, Austrian officials said they may withhold the next 190 billion euro contribution to the troubled economy’s bailout fund. Elsewhere, Germany’s Deputy Finance Minister warned they would not back off pressure for a permanent rescue mechanism (saddle bond investors with losses) while fear continues to build that Portugal is soon to follow on the heels of Greek and Irish crisis.

British Pound Helped by High CPI Reading, Hindered by BoE Reiteration for No Hikes

If the market simply followed economic releases, the pound may have surged Tuesday with news that October CPI accelerated to a 3.2 percent rate (a clip that is well above the BoE’s tolerance band). However, the promise of interest rate hikes was completely squashed with BoE Governor King’s statement. Though he did see inflation peaking at 3.7 percent, it was reiterated that they may undershoot medium-term.

Australian Dollar Remains Preoccupied with Rates, Risk as Growth Forecast Indicator Stagnates

The only thing that can seem to stop the Aussie dollar’s advance is underlying risk appetite itself. And, with the S&P 500 leading other capital markets lower, there is a growing wave of uncertainty shaking investors out of their positions. Yet, despite the faded taste for risk and anti-carry push now; economic and interest rate expectations for Australia are still exceptionally robust. When markets turn, the Aussie will lead the move.

New Zealand Dollar Will Find Little Trading Impetus in Upstream 3Q Inflation Figures

Like its Australian counterpart, the New Zealand dollar is beholden to risk appetite trends. In fact, with a less sound economic and financial foundation, the currency is perhaps a little more sensitive to changes in confidence. However, perhaps improved interest rate speculation can improve the currencies standing. We will get upstream 3Q inflation figures early tomorrow; but they won’t carry the same influence as CPI data.

Contributed By: DailyFx

Eurozone sovereign debt concerns continue to dominate the markets at present, with broader sentiment being weighed down on the prospects that a timely and acceptable resolution to these problems will not be achieved at anytime in the near future. This has weighed heavily on the Euro over the past several days, while all other major currencies have also traded lower against the buck in sympathy. Also seen weighing on global sentiment have been fears that China will continue to take measures to tighten monetary policy and curb growth on escalating concerns over rising inflation. This has contributed to a decline in global equities and commodities prices, with the Greenback also very much benefiting from these fears.

So far in early Wednesday trade price action has been less than compelling, with all of the major currencies consolidating their latest setbacks against the US Dollar. But any mild bids that have been seen in currencies, have been attributed to some accommodative comments from various Fed officials, with Fed Rosengren, Evans and Lockhart all more than expecting the Fed to fully utilize the $600B in additional quantitative easing. Still, with the broader negative sentiment, negative Eurozone and negative China forces at play, we see the risks for additional upside in the Greenback over the coming days, with 1.3335 the next key level to watch in Eur/Usd. As such, our recommendation would be to continue to look to sell currencies on overdone intraday rallies against the buck.

Looking ahead, the Bank of England Minutes and UK employment data (6k jobless claims change expected, 7.7% unemployment expected) is due out at 9:30GMT, followed by Eurozone construction output at 10:00GMT. US equity futures are tracking moderately higher into the European open, while commodities trade flat and consolidate their latest declines.

Contributed By: DailyFx

Commodities – Energy

Crude Oil Slammed Amid Continued Risk Aversion

Crude Oil (WTI) - $82.37 // $0.03 // 0.04%

Commentary: Crude oil plunged almost 3% on Tuesday, the third loss in as many days, to settle at $82.34. Oil has fallen almost 7.5% since putting in 25-month highs at $88.63 just last week. The catalyst for the latest move was continued European sovereign debt concerns. We are maintaining our position that this negative news flow is merely an excuse for traders to lock in recent profits rather than something that will derail the larger uptrend in crude oil and equity markets. The three bullish underpinnings of our bullish thesis in order of importance: 1) the robust growth in emerging markets economies, 2) the Fed’s QE2 program, and 3) the improving U.S. labor market.

Staying on the subject of the U.S. economy, we saw a solid reading on industrial production released on Tuesday. While the headline figure showed no change in production for the month of October versus the 0.3% that was expected, the miss was due to a decline in utility production which can be attributed to mild weather. More importantly, manufacturing output rose a notable 0.5%, suggesting that one of the biggest drivers of the economic recovery is still in good shape.

Tomorrow brings the weekly U.S. government inventory figures, which have been showing much larger-than-expected withdrawals in recent weeks. We will see if this bullish trend continues. The API survey is indicating that it will, with the industry source indicating a 7.6 million barrel draw in crude inventories, a 1.7 million barrel draw in gasoline inventories, and a 0.2 million barrel build in distillate inventories.

Technical Outlook: Prices have taken out support at a rising trend line set from mid-September as well as the horizontal barrier at $83.27. The bears now aim to challenge $79.49, with the $83.27 recast as near-term resistance.

Commodities – Metals

Gold Loses Nearly $100 since Last Week

Gold - $1336.70 // $3.00 // 0.22%

Commentary: Gold continued to correct on Tuesday, shedding $20.90, or 1.54%, to settle at $1339.70. Prices got as low as $1329.70, which is a full $95 below the all-time high set last week at $1424.60. Given the highly speculative nature of gold’s advance, it isn’t surprising to see this trade unwind so quickly. Moreover, as we’ve been pointing out, the rise in gold prices has not been supported by a corresponding rise in gold ETF holdings.

The specific driver of gold price action on Tuesday was a general retrenchment of risk appetite across financial markets, as well as an across the board advance in the U.S. Dollar. The task now is determining where this correction ends and if any buying opportunities emerge. Because gold remains extremely elevated, it will be awhile before we are comfortable accumulating the metal even for a trade. At this point, it may be wise to turn to technical indicators for guidance.

Technical Outlook: Prices have breached rising trend line support set from late July. Sellers now target $1322.39, the 38.2% Fibonacci retracement for the 7/28-11/9 advance. The broken trend line, now at $1356.46, has been recast as near-term resistance.

Silver - $25.37 // $0.11 // 0.42%

Commentary: Despite the steep drop in gold prices, silver managed to finish essentially unchanged on Tuesday. Prices did test lower levels near $25 in early trade, but settled at $25.48. Given that silver has fallen so precipitously in recent sessions, this pause is not surprising, but if gold continues to decline, expect silver to tag along.

The gold/silver ratio fell slightly to 52.7, but remains higher than levels earlier this month near 50. (The gold/silver ratio measures the relative performance of the two precious metals. A higher ratio indicates gold outperformance while a lower ratio indicates silver outperformance).

Technical Outlook: Prices have stalled above support at $25.33, the 61.8% Fibonacci retracement of the 10/22-11/09 upswing, with a Doji candlestick hinting a corrective upswing may be in the cards. Near-term resistance lines up at $26.10, the 50% Fib, while renewed selling targets the 76.4% level at $24.37.

Contributed By: DailyFx

60 Minute Bars


“Keep in mind the potential for an extended first wave count in which this latest drop is a terminal thrust from a small triangle.” The latest thrust certainly appears to have been from a 4th wave triangle and the decline channels nicely. Waves a and b appear complete so expectations are for wave c to spike above 13776 and test 13800-13830 before the larger decline resumes. Bottom line, the larger EURUSD trend is down and I favor selling rallies.

Contributed By: DailyFx

60 Minute Bars


“An AUDUSD top is most likely in place.” 5 waves down from the high are visible, which confirms that the larger trend is down but also suggests that a corrective advance is around the corner. What’s more, the latest decline is probably a terminal thrust from a triangle. Resistance is at 9950. In the event of additional weakness, support is 9700 then 9650.

Contributed By: DailyFx

 120 Minute Bars

While the longer term picture remains constructive, the USDJPY is vulnerable over at least the next week. The rally from the low may be a completed diagonal, which warns of at least a decline back to 8165. The next level of potential resistance is 8400.

Contributed By: DailyFx

The GBPUSD is failing just ahead of its year+ resistance line. The line is at 16310 this week. For some time, I’ve favored the idea that a triangle is unfolding from the January 2009 low. If this is the case, then the GBPUSD should decline for months towards 15000 in wave d. Near term, the GBPUSD appears to have put in a secondary top at 16185.

Contributed By: DailyFx

The dollar index climbed smartly on Monday as the buck continued its journey higher, touching the highest level since October 1. The dollar was boosted early in the day by stronger than expected retail sales in the US, the recent string of better-than-expected data out of the US is calling into question if QE2 is warranted and how much will really be implemented. The index continued to gain late Monday as Treasury prices deepened their decline, pushing 10-year yields towards the highest level in three months follow a report that a Moody’s analyst said extending Bush tax cuts would be bad for the US credit rating. As Treasury prices tumbled US stocks erased the bulk of their gains with the positive sentiment that prevailed after the jump in retail sales getting knocked.

The index has come under some pressure in the over-night session as US Treasury prices climbed (and yields fall) after attracting some bargain hunting interest out of Asia with market players call the massive sell-off over the last two days as over-done. Adding to the pressure are Fed Yellen’s comments in a WSJ interview defending QE2 and with a generally bearish outlook for the US economy she stays in line with her generally dovish stance.

Contributed By: DailyFx

We have long argued that the Euro remained sharply overbought against the US Dollar through recent trade, and the threat of a speculative positioning unwind pointed to sharp EUR/USD losses. Debt-troubled Ireland saw its bond yields surge despite officials’ insistence that the country had not requested or needed immediate Euro Zone fiscal aid.

Speculation that Euro Zone officials were actively negotiating a fiscal aid package for Ireland only worsened bond yield spreads. Elsewhere, Austria’s Finance Minister announced that the country would be withholding its share of the Greek bailout package for the coming month due to Greece’s failure to meet deficit targets.

Though ostensibly unrelated to Ireland, Austria’s surprise move suggests that member states are growing increasingly tired of fiscal bailouts. There is little denying that such anti-bailout sentiment could further stoke fears of Euro Zone instability amidst surges in Irish, Portuguese, and Greek bond yields.

The uncertainty surrounding Ireland and other debt-ridden EMU countries seems to have been the impetus to cause a wave of position-covering in the Euro, and we see similar contractions in other leveraged markets.

A continuation of such market deleveraging threatens continued losses in the Euro, Australian Dollar, New Zealand Dollar, Canadian Dollar, and Swiss Franc. As of last week, CFTC Commitment of Traders data showed that Non-Commercial traders—typically large speculators—remained heavily net-short the US Dollar against these key currencies. We could see the US Dollar continue to recover as markets panic and cover overextended US Dollar short positions.