Risk Trends Level Off but Crude Continues Lower as Growth Numbers Cool

North American Commodity Update

Commodities - Energy

A Clear Channel will Pit Fundamental Conviction against Technical Opportunity for Crude Traders

Crude Oil (LS Nymex) - $75.24 // -$0.15 // -0.20%

Putting in for its fifth consecutive daily decline, crude has matched the performance of its late-June / early-July bear swing and simultaneously confirmed the influence of a near three-month rising trend channel. While the bear trend that was extended into the start of this week has confirmed the most prolific bear trend in six weeks and tested lows not seen in five, the combination of fundamental and speculative influences may act to prevent a follow through on this current swing. The rising trend in swing lows from the low on May 25 and July 6 matches up nicely with today’s low around $75. Alone, this wouldn’t stop the market; but the fact that scheduled event risk for the rest of the week is exceptionally light and risk-based trends have cooled in most other capital markets means there may not be enough conviction to overwhelm technical interest in the area.

For fundamental encouragement today, energy traders would have to take account of physical supply-and-demand expectations as well as risk appetite influences. Expectations for future consumption were deflated by the second quarter Japanese GDP reading. The world’s third largest energy consumer reportedly grew an anemic 0.1 percent in the three month period to cool a robust annual-paced recovery to a 0.4 percent pace. Coupled with the tempered pace of expansion for both the US and China, this data further tips the scales by undermining the most sensitive element of price discovery for crude prices – demand. Further undermining any early attempts to drive the oil to a reversal; the US would release its own Empire Manufacturing survey for the month of August with a weaker than expected reading of 7.1. Looking ahead to tomorrow, the issue of growth-born demand will be raised once again in the US industrial production report.

On the typical, Dr Jekyll side of the market today, risk appetite would offer little support for oil through speculative channels. Looking across the market, we would see US equity benchmarks turn to chop and ultimately finish the day almost unchanged (at least that is the case for the Dow Jones Industrial Average and S&P 500). Following the past week’s Chinese/stimulus/growth wave of uncertainty, we see a distinct contrast in this week’s otherwise light economic docket. However, a light calendar does not mean an unforeseen event cannot rouse volatility and perhaps trend. Looking ahead to tomorrow for example, there is a scheduled auction of Irish and Spanish debt that could revive concern that strapped governments may not be able to tap the market to balance slowed growth and costly austerity measures. Futures traders should not that the September NYMEX crude contract expires on the 20th; so open interest is rolling out to October. That being said, volume is still relatively high for both contracts.

Crude Futures Chart (Daily)

Chart generated usingFXCM Strategy Trader

Commodities - Metals

Gold Advances to a Fresh Six-Week High and Comes One Step Closer to Record Prices

Spot Gold - $1,225.15 // -$9.65 // -0.79%

Gold would follow through on last week’s push above the 50-day moving average technical boundary and the tentative close at six-week highs. Today, “tentative” was replaced by confirmed with a moderate advance during a session that that was defined by exceptionally light volatility in other asset classes. Another six-week high comes along with a meaningful move above the temporary $1,220-range high set into place back in the beginning of July. You don’t have to be a technical trader to recognize the bullish trend that has developed for the precious metal over the past three weeks. At this level, a run to (and beyond) the record highs set back in late June should be relatively easy to accomplish – given the right mix of fundamental encouragement that is. And, herein lies the trouble.

A quick scan of the scheduled docket shows that there is little in the way of data or events that would meaningfully impact volatility levels much less alter the course on market-wide risk trends. That being the case, we have already seen risk-sensitive asset classes already downshift momentum in their risk aversion moves: equities were little changed and the safe-haven US dollar put in for its first loss in a week. From today’s activities, the initial second quarter growth reading for Japan potentially had the influence to alter expectations of risk taking and/or global growth. However, the sharp deceleration in activity wouldn’t encourage much in the way of diversification away from exposed asset classes (which is even more remarkable given the fact that a bearish trend was already in place from last week). Keeping tabs on sentiment trends on other sensitive regions, China’s central bank reported overdue payments on short-term commercial bills grew 10.1 percent in the previous quarter and a US loan survey reported demand for credit has not improved. Tomorrow, speculative trends - and thereby the demand for the safe haven gold - may be stoked by the success of sovereign debt auctions in Ireland and Spain. Should fiscal troubles persist for these economies despite recent GDP readings, it will be a big step towards justifying gold at such incredible levels through its value as an alternative currency.

In the futures market, the liquid December Comex gold contract reported volume of 68,550. This was the lowest level of turnover since July 23rd. It is generally a discouraging sign when a move in price is not supported by volume.

Spot Silver - $18.40 // $0.25 // 1.38%

Standing in stark contrast to its risk-sensitive peers and its safe-haven compatriot (gold), silver would mark a tremendous advance through the US session. The commodity would slowly drift higher through from the opening of electronic trade; but there was a clear bout of volatility just after the pit open on the COMEX. This rally was not risk or sentiment based – neither development would be seen in other asset classes – so it is most likely a factor of asset-specific speculative demand.

Spot Gold Chart (Daily)

Chart generated usingFXCM Strategy Trader

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Written by John Kicklighter, Strategist

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