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The Biggest Drop in Two Weeks Helps Confirm a Crude Reversal

The Biggest Drop in Two Weeks Helps Confirm a Crude Reversal

2010-03-15 23:25:00
John Kicklighter, Chief Currency Strategist

North American Commodity Update

Commodities - Energy

The Biggest Drop in Two Weeks Helps Confirm a Crude Reversal

Crude Oil (LS NYMEX) - $79.86 // -$1.38 // -1.70%

A sharp decline through the week’s open for crude is a convincing sign that the market has indeed reversed course after running a five-week bullish trend and just before testing two-month highs. In fact, the active futures contract on the NYMEX would put in for the biggest single-day decline in two weeks, a move that would subsequently confirm the first back-to-back daily loss for the instrument since the February 4th/5th plunge. This rally would have a tangible, fundamental component; but much of the influence is traced back to sentiment considerations. Having rallied through most of February and the first half of March, speculators have come to a point where optimism has to be reconciled with realistic projections for risk appetite and demand for the physical. With a 16-month high in view, a critical assessment of progress in speculator positioning and economic activity leaves little room for further appreciation even if investor interest was capable of surpassing the closely watched $84 level. This may seem to stand in contrast to the rise in open interest in the futures market (currently at a 21-month high 1.4 million contacts); but speculative interest can often diverge from practical demand expectations. It Is the correction whereby sentiment meets reality that often introduces the beginning of new trends.

Looking further into the contributing factors to today’s tumble; there was plenty to garner from investor activity and macro economic data. Through the typical channels of risk appetite developments, equities were little changed; but the US dollar would put in for a significant advance – the first in four days. This mixture of tempered optimism and rising pricing instrument naturally translates into a cheaper commodity. Combining the concerns of demand from the speculative and growth factions of the market, Moody’s suggested in a report Monday that the US and UK were putting in for the swiftest move towards losing their respective top sovereign credit ratings. Just the fear of rating cut will encourage higher borrowing costs for the economic powerhouses that will curb speculative interests and the governments’ ability to stimulate their economies. On the data front, US factory output rose a meager 0.1 percent through February – a respectable number given the unfavorable conditions of the period (weather). For a global perspective, the world’s second largest economy (Japan) received an upgraded bill of health by the government and a rise in consumer sentiment. Looking out over the next 24 hours, the big-ticket economic indicators will either compliment or work against dominant risk trends. Furthermore, later in the session, the API crude inventory report will reintroduce supply-side considerations to the fundamental picture.

Commodity 03152010 1

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Commodities - Metals

Gold Levels off as Sovereign Debt Concerns Balance Dollar’s Controlled Recovery

Spot Gold - $1,107.90 // $6.01 // 0.54%

Combining the value of a speculative instrument, dollar-hedge and safe haven asset; gold traders would have to indentify which factor was most important for establishing a fundamental bearing. As for risk appetite, European equities were notably lower on the day while US shares finished the session little changed. Furthermore, the US dollar would put in for a hearty advance against its most liquidity counterparts. Normally, the combination of these two factors would lead the precious metal lower; but gold would ultimately put in for the biggest advance in 8 days. So what then was the source of this commodities strength? Over the past year, this instrument’s function as a safe haven has generally diminished as the appetite for yield and capital returns has leveraged the metal’s volatility and preternatural climb to record highs. However, the demand for an alternative investment today takes on a new face: balancing the risk of a depreciating fiat currency. Sovereign debt concerns were leveraged Monday by suggestions that EU officials, through their two-day meeting, wouldn’t produce a meaningful backup plan to bailout Greece or any other member nation that fell on hard times. In fact, Finance Ministers for both Germany and France would go into the discussion vowing that no major changes in policy would be made. This leaves the region open to another adverse turn in sentiment. Far more surprising however was the warning issued by Moody’s that most of the world’s largest industrialized nations had moved “substantially” closer to seeing the credit ratings downgraded. At the front of the line was the US and UK. If these economies’ debt worthiness was indeed lowered, the impact on the credit market would be felt world-wide.

Spot Silver - $17.10 // $0.03 // 0.18%

Without a prominent attachment to sovereign credit interests and safe haven flows, silver would look for guidance from its more typical drivers. Despite the tumble in European equities, investor sentiment was ultimately little changed through the end of the trading session. More interesting was the commodities response to the US dollar. The first advance in four days would leverage a significant precession on the precious metal; but the metal would ultimately absorb the ‘cost.’ Taking stock of price action, the active silver futures contract on the COMEX has seen the smallest rolling average daily range for the past month since February 2nd. This was the period just before the sharp plunge and steady reversal. If history is any guide at all, the future may point to more active markets in the near future.
Commodity 03152010 3
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Written by John Kicklighter, Strategist
Questions or Comments about this article? Send them to jkicklighter@dailyfx.com

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