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Growth and Risk Appetite Trends Improve on EU Rescue, Crude Enjoys the Support

Growth and Risk Appetite Trends Improve on EU Rescue, Crude Enjoys the Support

2010-05-10 22:27:00
John Kicklighter, Chief Currency Strategist

North American Commodity Update

Commodities - Energy

Growth and Risk Appetite Trends Improve on EU Rescue, Crude Enjoys the Support

Crude Oil (LS NYMEX) -  $77.20   //  $2.09   //  2.78%
All it would take was one of the largest collective bailouts in modern financial history; but the fire was finally put out Monday for crude oil. The first advance in five sessions – following the worst weekly decline for the commodity since the exhaustion selloff back in mid December 2008 – the benchmark energy product was climbing on the combined effort of growth and investor sentiment relief. This fundamental and speculative boost would come from the same source, the announcement that the European Union and IMF had drawn up a loan program to prevent the spread of sovereign credit troubles estimated to top 750 billion euros. Naturally, this is a significant step to stabilize the EU itself; but it further helps to balance one of the biggest threats to the normal functioning of the world’s capital and credit markets. As one of the favored physical speculative assets amongst the global investor crowd, oil was a natural benefactor to the news. In fact, measuring the influence of this news: the S&P 500 marked its biggest rally in 13 months; some European equity indexes rallied more than 10 percent; and the US dollar (the main pricing instrument for oil) marked its biggest tumble since March 18th of last year. However, there is still obvious skepticism over the health of the speculative markets. A clear sign of this doubt can be seen in the dollar’s aggressive, bullish reversal into the US session. The costs and availability of funds for this plan are far more invasive than many may be accounting for. Not only are the ‘healthy’ EU members going to have trouble raises the funds when they are already on pace for fiscal consolidation; but those countries drawing on the aid will have to suffer deep recessions and a form of foreign control over domestic finances to gain access. These are realities that don’t easily fit into the quick recovery scenario.
Though the speculative implications of European rescue effort is obvious, energy traders are just as interested in the growth consequences. Not long ago, a number of officials (the ECB’s Weber) and policy bodies (the Chinese central bank) warned that the spread of a crisis in the European area could undermine the still-fragile recovery that the global economy is trying to foster. We have seen what kind of effect a financial crisis can have on actual growth with the Great Recession. The connections for this new threat should be clear. Yet, while this guarantee reduces the probability of an imminent credit seizure, it does not resolve the situation where those EU members with unacceptably high deficits will have to suffer second bout recessions while those doling out the aid will have to take a hit in their own progress towards expansion. Outside of the EU, oil traders would also take note of the trade figures from China. The second largest consumer of energy products in the world increased net imports of the precious commodity to a record 5.13 million barrels per day last month. Considering this economy’s remarkable growth is built largely on stimulus spending, there is reason to be skeptical from both speculative and fundamental angles on the future.

Commodities - Metals

Gold Suffers its Worst Decline in Three Weeks after EU Rescue Eases Sovereign Debt Risk 

Spot Gold -  $1,203.10  //  -$5.30  //  -0.44%
News that European officials were able to pass the most comprehensive rescue plan since the inception of the regional Union helped cool fears of a spreading crisis and sovereign credit downgrades. Like any safe haven asset, gold would suffer with the improved sentiment, marking its worst intraday decline in five months. However, the precious metal is not your standard alternative-to-risk assets. While it maintains a history as a harbor for funds during periods of uncertainty or inflation; recently, investor interest has centered on the commodity’s value as an alternative currency when so many of the standard monetary units have seen their sovereign credit ratings come under review. When emerging market currencies are considered to prone to volatility while the industrialized benchmarks are at risk of being devalued by ratings agencies, there are few options left to investors looking to protect their capital. Using gold’s unique status in the global array of assets, we can infer from the metal’s sharp intraday reversal that the EU rescue program doesn’t fully offset the likelihood of downgrades for Greece, Portugal and Spain – much less the UK and US later down the line. Looking at investor demand for the precious metal, the SPDR Gold Trust (the world’s largest ETF backed by metals) reported a 2.71-ton increase in net holdings to a record 1,188.5 tons. This makes this collection of investors a larger holder than the Swiss National Bank.
Spot Silver  -  $18.49   //  $0.13  //  0.72%
Though silver has an undeniable correlation to its more expensive counterpart (gold) - and thereby a connection to risk trends - this particular metal is far more reactive to speculative interests and global growth projections. This being the case, it is surprising that silver’s advance Monday was so modest when the S&P 500 enjoyed its biggest daily climb in over a year. Though the third consecutive positive close, the day’s performance was far weaker than Friday’s impressive rally. Does this reflect a unique characteristic of the metal or an interesting angle on risk appetite? Time will tell; but the answer is likely ‘both.’

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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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