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Holiday Trading Volatility Wins out Against NFP Event Risk to Hold Crude from Deeper Plunge

Holiday Trading Volatility Wins out Against NFP Event Risk to Hold Crude from Deeper Plunge

2010-07-02 22:16:00
John Kicklighter, Chief Currency Strategist
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North American Commodity Update

Commodities - Energy

Holiday Trading Volatility Wins out Against NFP Event Risk to Hold Crude from Deeper Plunge

Crude Oil (LS NYMEX) -  $72.20  //  -$0.75   //  -1.03%  

Alternatively, the promise of an extended weekend for the US markets for the Fourth of July holiday would prove a powerful sedative in the absence of an incredible in risk appetite. Following the previous day’s rally, it would not have seemed a remarkable task to extend what could be construed as a critical break and reversal from $70. That being said, few other risk-sensitive securities would take the opportunity to put in for a meaningful drive. For the active US-based NYMEX futures contract, the session’s volatility was far lower than yesterday’s 343,644 contracts, trading only 236,095 during US floor hours.

It was a crapshoot ultimately as to whether energy traders could manage a meaningful move from crude on the day. The holiday weekend was balanced nicely with previous session’s momentum. The deciding factor was today’s top event risk: the US labor data. A well-known market mover, US NFPs was set to give another unusual reading with expectations for a 130,000 net contraction that clearly contrasted to the previous month’s large 431,000 increase. In the end, the immediate speculative impact this data would hold was deflated by the slight deviation from expectations with a 125,000 net reduction in employment. Digging a little deeper, the 83,000 job increase in private payrolls is a modest trend to compensate for 8-plus million jobs lost over the previous two years. Furthermore, the cooling in wage growth was far more meaningful than the drop in the unemployment rate (an development most likely caused by American’s leaving the market). What does this mean overall for oil? The outlook for economic activity and thereby energy demand is curbed by this notable market mover – albeit modestly.

Looking ahead to next week, the US commodities and exchanged-based futures will be closed for the holiday. Trading in other regions and OTC will continue; but the effects will be prominent regardless. Heading into more liquid conditions, oil traders will have few key economic drivers to assess global activity levels by. Risk appetite trends will therefore have the greatest impact on this market. The benchmark US equity indexes have already slipped to new lows for the year and now await confirmation of trend to develop momentum. Crude will look for this guidance to progress through its own notable support between $72.00/71.50. Looking at speculative positioning from the CFTC, net longs grew 6 percent through the week ending June 29th to 37,120 contracts. This is still well off the balance set only two months ago.

 COMM 10-07-02_01

Commodities - Metals

Gold Stalls at its Next Obvious Support, Financial Markets May be Less Encumbered Next Week

Spot Gold -  $1,211.90   //   $12.95   //   1.08%  

The plunge from gold Thursday was a hard act to follow. The sharpest decline in months was not only founded on a market-wide shift (that would spark a deviation from the typical correlation the metal holds to traditional risk-based asset classes); but it was founded with considerable help from the technical crowd. With a long-term rising trend and extended period of congestion, the speculative crowd was very likely to put up a meaningful resolution to congestion. Considering the previous weeks had seen bulls fail to spark meaningful follow through on a break to record highs first above $1,250 and then the inability to even match this new swing the past week, there was a greater propensity for a bearish move. That being said, follow through was an entirely different concern. The $1,200 level was already significant for its psychological aspects as well as a long-term 38.2 percent Fibonacci retracement that many technicians no doubt took note of. Though ultimately, it would come down to speculative interest and fundamental drive.

For guidance, this precious metal wouldn’t really find a catalyst through a market-wide shift in sentiment. Recently, gold has not followed the traditional route of risk appetite / risk aversion that benchmarks like the Japanese yen or Dow Jones Industrial average are prone to follow. Yesterday’s performance was one of the exceptions to the rule (and a contradictory one at that) as significant losses in other positions would lead investors to raise margin by selling off some of their gold holdings. Looking for a true driver for this commodity, we would need to look at financial uncertainties around the globe and particularly in Europe. After the ECB auctioned off its six-day lending facility to high demand (and certain concern for policy officials), we were forced to interpret standard economic data for its pull through impact on capital flow. The top market-moving US NFPs held substantial promise even for this outlying commodity; but the data that was released would do little to fuel a strong speculative drive. On the other hand, the net outcome of the report was one that would suggest the world’s largest economy is struggling to jumpstart its labor market and would thereby slow the global recovery. Tempering growth, investment yields and the hope for stable currency exchange rates; a subtle bounce would come through for gold.

Looking at delayed futures activity data, yesterday’s plunge would have the expected effect on gold. Turnover on the day surged from a weekly average of 142,000 contracts to 291,000 contracts. Aggregate open interest on the other hand (total open interest for the various futures contracts) actually ticked lower to 591,000 contracts. From the CFTC’s Commitment of Traders wrap up, we see net long interest in gold among speculators rose a modest 3 percent to 244,725 contracts – slowly approaching the record high set back in November 

Spot Silver  -  $17.86   //  $0.07   //   0.39%

Having already marked a long-awaited breakout from an extended period of congestion, silver would have little speculative pressure to develop its own follow through. Furthermore, guidance from a general shift in risk appetite or strong run from gold prices would similar escape traders’ attentions. For speculative interest, the COT reports net long holdings for COMEX silver futures contracts rose 5 percent to 41,910 through Tuesday. Interestingly enough, the delayed aggregate volume data from the exchange shows yesterday’s plunge led to a comparatively mild rebound in volume.

 COMM 10-07-02_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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