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Crude Traders Unable to Exploit Technical Break as Risk Ways the Market Down

Crude Traders Unable to Exploit Technical Break as Risk Ways the Market Down

2010-03-05 00:04:00
John Kicklighter, Chief Currency Strategist
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North American Commodity Update

Commodities - Energy

Crude Traders Unable to Exploit Technical Break as Risk Ways the Market Down

Crude Oil (LS NYMEX) - $80.39 // -$0.48 // -0.59%

Without momentum to step in to support yesterday’s push above $80.50, the active light sweet crude futures contract on the NYMEX would ultimately be led to a corrective move. So, while the commodity technically marked its highest close since January 11th Wednesday, the market is still anchored to the congestion that has stalled progress for going on two weeks now. Undermining speculative efforts to carry crude to a new 16-month high are the dampening effects that stalled risk appetite has had across the capital markets. The same hesitation at the threshold of a new trend was seen in equities and EURUSD. The curb on sentiment is still a culmination of many different factors (including the struggles of an economic recovery, a withdrawal of government stimulus and uncertainty in sovereign debt risk); but risk aversion was leveraged today through a few notable events. The European Central Bank and Bank of England’s respective monetary policy decisions would offer little guidance on the difficult balance between growth and debt reduction. Both group’s would maintain their benchmark rates and the BoE maintained its 200 pound bond purchasing program. However, the ECB would take another, measured move towards tightening with the announcement that it was switching to a variable rate on its three-month cash offers. Exacting a greater effect on sentiment, Greece finally decided to go forward with its necessary 5 billion euro bond sale after its spreads dropped following yesterday’s additional austerity cuts. With a bid of nearly three times what was offered, the market seemed confident in Greece’s ability to finance its debts. Nonetheless, calls for the EU to announce details on any aid package should the member economy need it from Finance Minister Papaconstantinou reflects the fine line this region is walking.

Going forward, it is very unlikely that oil will be able to decouple from its role as a speculative instrument. With global investors wary of adding to risky positions for fear of an unforeseen crisis, going long energy when global growth is still tame would be a risky step – especially at the market’s current highs. As for the ongoing adjustments to demand forecasts (through growth readings), the economic docket was light meaningful releases. Topping the list was the revision to the Euro Zone’s fourth quarter GDP figures. Whereas the headline figures for growth were unchanged at a 0.1 percent increase over the three-month period, household spending was notably upgraded to an unchanged figure. In other news, US factory orders rose by 1.7 percent in January and consumer spending - measured through the ICSC Chain Store Sales report - rose 2.7 percent. Tomorrow, the US non-farm payrolls could give the most meaningful adjustment to growth forecasts for the world’s largest economy that the market has seen in some time. Expectations are already set low with a forecast for 65,000 jobs lost and an uptick in the unemployment rate to 9.8 percent; but this speaks more to the slow recovery the economy has ahead of it rather than ushering in renewed fear of a secondary recession. From the supply side, the US Department of Energy inventory report for the week ending February 26th yesterday recorded a 4.03 million barrel increase – extending the longest series of weekly increases since May and which pushed total inventories to its highest level since August. Alternatively, refineries increase their utilization rates to 81.9 percent – the highest level since October.

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Watch our weekly, live coverage of the DoE Inventory figures every Wednesday beginning at 10:15 AM EST.

Commodities - Metals

Tempered Risk Appetite Draws Gold’s Controlled Rally to a Close

Spot Gold - $1,131.80 // -$8.10 // -0.71%

Spot gold fell for the first time in six days, ending the longest stretch of gains since early October. However, this pullback would ultimately come at the same pace the initial upswing was running. Quantifying the lack of momentum behind the metal’s recent bull trend, the CBOE’s Gold Volatility Index fell to a seven-week low of 20.06 percent. Notably, this activity levels just above the January and October lows that preceded forceful bearish and bullish waves respectively. This trend towards moderation comes from the soothed sense of financial uncertainty that peaked with the perceived Greek crisis. However, this is not to mean that risk trends have vanished for good while inflation and growth concerns step back in. Greece’s ability to fund its deficit is still questionable and a revival in market-wide fear could expose doubts about this region. Yet, even if this hot spot for investor anxiety were to fade, there is still a matter of ballooned global deficits and warnings surrounding sovereign credit ratings for even the largest economies. This raises the value of the metal as a safe haven when investors are looking for an alternative to devalued fiat currency. In the meantime, Friday’s US employment report could resuscitate gold bug’s focus on risk trends as this data weighs on investors’ confidence about the global recovery and further exacts its influence on the US dollar.

Spot Silver - $17.12 // -$0.08 // -0.44%

Liked its more expensive counterpart, silver would end the day in the red. However, the pullback the metal would put in for was notably more controlled than the series of daily advances that preceded it. Lacking the clear function as a store of value that gold so blantantly exploits, this commodity is more sensitive to the whims of risk appetite and the actions of the US dollar. This could lend itself to leveraged volatility following the release of the often-unpredictable US NFPs.

COM304b

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

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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