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As Sentiment Trends Cool, Crude Traders Look for Guidance from Growth Prospects

As Sentiment Trends Cool, Crude Traders Look for Guidance from Growth Prospects

2010-05-24 22:34:00
John Kicklighter, Chief Currency Strategist
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North American Commodity Update

Commodities - Energy

As Sentiment Trends Cool, Crude Traders Look for Guidance from Growth Prospects

Crude Oil (LS NYMEX) - $70.38 // $0.34 // 0.49%

While the NYMEX-based crude contract would technically eke out a modest advance for the opening day of the week, the market has essentially passed the day unmoved. In fact, this benchmark energy product has been confined to congestion for the past week; the only difference between today and last week is that the level of volatility is dissipating. On the other hand, the investing masses are seemingly skeptical of this recent slump in activity as can be seen in the CBOE’s Crude Oil volatility index. Having retested an eight-month high of 47.0 percent, traders are still paying high premiums on options to protect against another dramatic change in the commodity’s price. Until this volatility is realized however, the masses will keep a constant vigilance on the speculative interests that underlie the capital markets. Feeding the risk appetite / aversion theme that has leveraged so much activity from the capital markets over the past month, the European Union’s questionable future was delivered a small jolt this morning when the Bank of Spain seized savings bank CajaSur as the firm moved closer to failure. While this would suggest a financial vulnerability for one of the EU’s larger member economies; the immediate threat would ultimately seem minimal as the local market benchmarks would weather the news with a relatively muted response.

Contrasting with the norm as of late, growth considerations would hold greater sway over crude Monday than the ever-volatile speculative cajoling that the threat of a financial crisis can encourage. Feeding demand forecasts early in the Asian session, investors were looking to the world’s second largest energy consumer (China) and its hesitancy in implementing growth and market cooling policy in the wake of the European Union’s troubles. For Japan, the outlook for economic activity was less optimistic according to the Cabinet Office’s economic outlook. The government maintained its assessment that the economy was “picking up steadily” from the previous month; but Finance Minister Kan would also remark that he would hold off on boosting his forecasts until after seeing the revisions for the first quarter GDP numbers to better assess whether stimulus and exports are putting in an unsustainable plug for the recovery. Rounding out consumption probabilities for the top three energy importers, crude traders would further enjoy an upgraded outlook for the United States. While the existing home sales data was questionable given the inventory glut; the Chicago Fed’s National Activity Index would point North with the best reading for the economy since December 2006. Furthermore, the National Association of Business Economics would release a survey that upgraded its forecast for growth this year to 3.2 percent from a 3.1 percent outlook just this past February. Is this round of news enough to substantially tip the scales of supply and demand going forward? Not likely.

COM-10-05-24-01

Commodities - Metals

In the Absence of Speculative Volatility, Gold Falls Back on Structural and Sovereign Concerns

Spot Gold - $1,94.95 // $17.85 // 1.52%

The tempering of Gold’s two-month run to record highs seems to have found a point of equilibrium today. Having slipped over six-and-a-half percent from its record high through Friday, the precious metal put in for its first advance in four days. While this advance wasn’t particularly remarkable compared to recent volatility; it was notable given the relative lack of activity in other capital markets. Before the end-of-the-day sell off in the US session, equities were quiet and relatively unchanged. The same general conditions were notable in the broader commodity market and fixed income. However, gold would establish a clear bias and consistent tend. This was no doubt encouraged by lasting fundamental concerns over the structural and lasting troubles the global financial market face. Speculators may swing from risk adverse to insistent through minute changes in data; but the concern over sovereign fiscal health is a matter that shifts very little (sans major market changes like introduction of the EU’s rescue program) and will therefore maintain support for a larger trend. Speaking of the European situation, the Bank of Spain’s decision to take over CajaSur reminds the investment community and policy makers that the mere promise of assistance is not enough to return the region to health. In fact, savings banks in Spain have fallen on such hard times that the government has established a fund for the group that could total as much as 99 billion euros – the majority of which has not yet been funded.

Spot Silver - $17.95 // $0.29 // 1.64%

Despite the late-session drop in equities and the strong performance from the US dollar through the New York session, silver would nevertheless advance for a second consecutive day. Normally, the precious metal – lacking the independent value of gold – will follow short-term speculative trends and maintain a positive correlation to equities and negative association to the US dollar (one of the preferred safe havens). However, Monday’s appreciation is not particularly incredible. On the whole, the capital markets were relatively stable through the most liquid part of the day; and this stability allowed the commodity to retrace some of the steep losses suffered through the second half of last week.

COM-10-05-24-02

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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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