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North American Commodity Update

Commodities - Energy

Crude Traders Abstain from a Drop in Sentiment as US Data Tops a Slow Day for Event Risk

Crude Oil (LS NYMEX) -  $76.21  //  -$0.14   //  -0.18%

With a downshift in fundamental activity between Wednesday and Thursday; we would see a similar shift in the quality of price action for the energy market. At the floor of its rising trend channel and a notable pivot level around $75.50, the benchmark NYMEX crude oil futures contract has found a technical boundary to discourage undue momentum from building without a clear picture of how both risk appetite and economic activity will develop through the near future. Yesterday, both underlying price drivers were in flux. However, it was the interest roused through an economic docket reporting cooling European-area business activity and the shocking drop in US home sales that really captured the market’s attention – sentiment sourced from uncertainties in the financial stability of the global markets would fall to the wayside. Today, neither the docket nor concern over the stability of the credit markets would encourage activity, leaving oil to a quiet session.

Offering a direct though temperate assessment of energy demand Thursday were goods orders figures from the Euro Zone and US. The European industrial new orders report for April would come in well below expectations with a modest 0.9 percent increase was nonetheless a reasonable moderation to the previous month’s biggest improvement in five years. The euro’s significant depreciation this year is expected to boost expects by 5 percent according to a European Union commission report today; but this is a lagging reading that does not truly account for the impact the financial troubles of May and June will have on activity. Similarly questionable as an assessment of business activity and therefore energy demand was the US durable goods orders report for May. The 1.1 percent drop in bookings was the first decline in six months. On the other hand, when transportation equipment is excluded, orders grew 0.9 percent; and the investment proxy (non-defense capital goods excluding aircraft) rose 2.1 percent. Considering manufacturing and business investment are two of the few positive contributing factors of growth for the US economy, this was more an indicator of necessity rather than encouragement.

Looking futures markets, the active nearby for the NYMEX (August expiration) saw another daily increase in open interest to a record 318,000 contracts though volume would notably pull down from yesterday’s high. Yet, assessing overall activity in the market, the aggregate the one week average in volume has actually declined to its lowest level since April 6th while aggregate open interest has just ticked up from its lowest level since the first week of the year. Investors have significantly divested from the crude market over the past month – perhaps a consequence of a general withdrawal of capital from risk-based markets that produce little or no yield. In the meantime, the difference between the active nearby futures contract and the instrument set to expire in two years fell $6.50 to its smallest spread since May 6th – a sign that the concerns over risk is dissipating.


Commodities - Metals

Concerns over the Financial Health of China and the Euro Zone Lifts Gold Just Short of a Breakout

Spot Gold -  $1,244.15   //   $6.80   //   0.55%

It would seem a straightforward correlation that equities were falling through the European and US sessions today; and gold (as a favored safe haven) would appreciate. However, the precious metal is less sensitive to volatile changes in the speculative tenor of the market and rather more focused on sovereign credit risks as well as financial stability. What’s more, the tumble in the S&P 500 wasn’t a shift that would reverberate across other risk-based asset classes. This means that gold was more than likely finding its guidance from other sources Thursday morning.

For scheduled event risk, gold traders would write off the durable goods orders report as a modest contribution to the growth forecasts for the United States. More pertinent to this asset and its unique appeal for global investors were updates on the deteriorating heath of the Chinese and European financial markets. From the EU, both credit default swap premiums and 10-year bond yields for Greece grew as confidence in the region’s weakest link slipped. Financial costs for governments across the region are rising and credit access for local banks is receding. At this rate, Greece will remain dependent on its neighbors’ assistance; and other members may have to eventually tap the EU and/or IMF for capital. Receiving less attention – but just as influential should conditions deteriorate – is the declining health of the Chinese credit markets. Fitch warned today that the boom in loans over the past few years and the effort to repackage and sell this debt increased the risk of a crisis for the world’s idyllic growth model. All told, this was a notable dimming of the financial future; but nothing particularly urgent. As such, there wasn’t enough fear/interest to push spot gold back above $1,290.

Spot Silver  -  $18.68   //  $0.15   //   0.79%

The volatility in risk aversion played out in speculative benchmarks like the S&P 500 equities index as well as the upswing in gold prices would translate into considerable activity for silver. Initially pitched in a steep decline through the early trading hours (pulling spot down to its lowest level in two weeks at one point); the metal would eventually follow gold’s path for a session close that was ultimately little changed. Looking at futures, aggregate open interest (delayed) fell back from its eight-month high 141,000 contracts; while volatility remains as choppy as price action.

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Written by John Kicklighter, Strategist
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