As Equities Cool, So Does Crude Despite a Supposed Improvement in US Growth, EU Markets

North American Commodity Update

Commodities - Energy

As Equities Cool, So Does Crude Despite a Supposed Improvement in US Growth, EU Markets

Crude Oil (LS NYMEX) - $76.54 // -$1.13 // -1.45%

After a three-day advance that clears notable resistance, it doesn’t surprise that the crude would put in for a correction that allows for some level of profit taking and fundamental moderation. However, it is interesting that this pullback should occur today when economic conditions seemed to support follow through on a bullish drive that had cleared its speculative hurdles. On balance, the economic news for the day would be absorbed into long-term forecasts that continue to discourage and overshadowed by a highly active speculative backdrop. Taking stock of investor sentiment today, the European hours found market participants bidding up equities and other risky assets on news that Spain’s debt auction had went well. This event was considered a litmus test for the level of concern surrounding the nation’s financial position following speculation the country would soon call on the EU and IMF for a rescue package akin to the one Greece had tapped. However, where bond yield spreads and equities improved on the news, US crude was little moved (the benchmark Brent contract climbed nearly $1.40 through the opening hours of the session).

With NYMEX-based crude futures holding their ground through the early morning bounce, energy traders would be more responsive to the subsequent dip in confidence as US liquidity came online. Before the official open of exchange trading in New York, equity futures and oil responded to a discouraging mix of initial jobless claims, first quarter current account levels and May consumer inflation data for the US. First time unemployment filings for the week ending June 12th unexpectedly rose to a month-high while the broadest measure of trade activity reported its biggest deficit since the closing three months of 2008. With all that taken into account, however, the Leading Indicators composite index (used as a gauge for economic activity in the coming three to six months) for May grew 0.4 percent and kept the world’s largest economy at or above the zero mark for a 14th consecutive month.

Looking at speculative interests, volume on the active NYMEX futures contract dropped to its lowest level since the contract roll back on May 20th (269,000 contracts). Looking at aggregate open interest through yesterday, the market is holding only 1.327 million contracts – just slightly off a two-and-a-half month low. Taking stock of the differential between US and UK oil in response to today’s speculative shifts, the spread between the Brent and WTI active contracts ballooned to a $2.04 premium for the former. This is the biggest gap since May 20th. Would the supposed recovery in European financial conditions at least encourage an improvement in the price difference between the July 2010 and July 2012 contracts? No. The contango actually increased $1.01 to $8.62.

Commodities - Metals

Gold Establishes a Triple Top at Record Highs Even as Investors Hail Spain’s Debt Auction

Spot Gold - $1,246.05 // $17.05 // 1.39%

If the speculative market’s traded in a vacuum, today’s economic event risk and financial headlines would have led gold to a far different outcome to the one it would take today. The metal put in for its biggest single-day advance in eight days and put in for a record close through the end of US trading. Yet, at the same time, today’s performance would still fit into a larger triple top pattern that tells technical traders that pressure is building for a volatility-fueled breakout in the very near future. What direction this resolution is leading to is a matter of debate. Proponents for a strong climb beyond $1,250 and on to $1,300 argue that the balance between record deficits and the economic fallout from trimming these shortfalls would virtually guarantee an open tap for capital to pour out of treasuries and risky assets into gold. Alternatively, treating the yellow metal as its own asset class and a defacto fiat currency would mean paying a record price for entry into a security that does not pay interest. Few speculators would find that an optimal situation for investment.

However, looking at today’s activity, there is reason to believe the masses would not act so rationally anyways. The strong rally on the day seems to contradict the news that the 3.5 billion euros in 10 and 30 year government debt that Spain had auction met strong demand. Just yesterday, rumors that the nation was on the verge of asking for its own financial life line from the EU and IMF had raised the hair on the back of traders’ necks. This successful sale is briefly encouraging; but there is good reason to believe the ECB supported this effort and Spain could still require assistance. Another reason today’s climb was unusual was the US CPI data. While gold bugs’ focus recently has been almost exclusive on sovereign risk, the commodity’s appeal as an inflation hedge is tied into its values as an alternative asset. That being the case, the fact that core inflation is running at its weakest annual pace since 1961 should curb this dynamic’s impact.

Spot Silver - $18.74 // $0.27 // 1.46%

Silver enjoyed one of its biggest rallies in nearly two weeks and was rewarded with a rally to a one-month high in the process. However, the metal has yet to really commit to a renewed advance. Reservation comes through the tempered advance in risk appetite in the rollover from the London to the New York session. That being said, the climb in equities through the European hours and a simultaneous advance from gold (its frequent coconspirator) would leave little outlet besides an advance for silver. That being said, should we look at price action for the commodity priced in euros, congestion remains. Clearly, this market is still searching for a clear direction.

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