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US Crude Wins its First Positive Performance in Six Days as Equities Struggle to Keep Their Own Gains

US Crude Wins its First Positive Performance in Six Days as Equities Struggle to Keep Their Own Gains

2010-07-06 22:52:00
John Kicklighter, Chief Currency Strategist

North American Commodity Update

Commodities - Energy

US Crude Wins its First Positive Performance in Six Days as Equities Struggle to Keep Their Own Gains

Crude Oil (LS NYMEX) - $72.20 // $0.06 // 0.08%

There was a dramatic swing in risk appetite trends through the day Tuesday; and crude would stick to its speculative interest while it tracked out the volatility. Through the Asian and European sessions, optimism would find remarkable momentum that quickly spread to most speculative asset classes. For equities, the buying pressure would lead to a near-three percent rally for the benchmark European indexes. Electronic trading on the US oil futures market would match this optimism and push the asset to a meaningful break from the aggressive bear trend that has been in place since the market reversed from the eight-week high set back on June 28th. However, this positive break wouldn’t maintain momentum as the rally quickly faded, eventually pushing crude back to the same level that it would open the day. Much of this late-session reversal can be traced back to risk appetite itself. Initially playing catch up to their European counterparts, US equities stalled well before hitting similar performance levels and briefly traded underwater towards the latter half of the day. Considering this is the first day of full liquidity for the global markets, it is difficult to suggest that either the morning rally or subsequent reversal is the true measure of sentiment. Time will tell.

Another contributing factor to oil’s poor performance during New York trading hours was the worst-than-expected reading from the ISM’s service sector activity report. While it may be easier to reconcile the link between factory activity and energy demand, the service report is in some ways a better gauge for defining supply and demand expectations. For the world’s largest economy, the service industry accounts for a vast majority and overwhelming proportion of output. This is reason enough for energy prices to slip with the first decline from this series in seven months along with a slip in new orders (six month low) and employment (pulling back from its highest level since December of 2007). For fundamental guidance over the coming 24 hours, German factory orders and Canadian business activity will not likely rouse a similar level of volatility.

Measuring speculative interests behind the market, this past Friday’s Commitment of Traders reading from the CFTC reported a modest 6 percent drop in net long interest to 37,120 contracts through the week ending June 29th. Net open interest held at its lowest level since the beginning of the year at 1.26 million contracts. On a shorter-term basis, volume on the active August NYMEX futures contract measured 296,000 contracts, well off of the high set this past Thursday on the break below $75. Also noteworthy was the increased difference between the nearby and two-year deferred contracts to $7.05 (the widest since June 22nd).


Commodities - Metals

Is Gold Reconnecting to Basic Risk Trends or is Confidence in Europe the Defining Factor in the Metal’s Strength?

Spot Gold - $1,193.05 // -$16.22 // -1.34%

Is gold reforming its direct links to risk appetite trends? With today’s dramatic rally in equities through the European session (and the lesser advance during the morning hours of the New York hours), the precious metal slipped beneath a meaningful technical support (a 38.2 percent Fibonacci retracement level) and subsequently dove to fresh six week lows. That would seem to match to the intensity of an approximately three-percent rally for the benchmark European indexes given the two assets classes’ usual, negative correlation. However, it may be too early to label gold a perfect hedge for equities once again. If that were the case, then last Thursday’s sharp bearish breakout for metal and stocks would complicate this fundamental convergence. Instead, it is more likely the case that we are looking at a unique case where a particularly interest factor of this sentiment swing is appealing to gold’s ‘alternative-investment’ role. No doubt contributing to today’s bullish efforts during the European session was the news that Spain had successfully tapped the debt markets and the ECB found more than enough bid for its weekly tender to absorb liquidity from its government bond purchases. Considering the Euro-area’s descent into a potential financial crisis has been the source of so much uncertainty recently, its potential recovery is a means for drawing capital back into the currency market and traditional asset classes.

Whether or not the correlation between equities and gold holds (as well as gauging the direction of the precious metal will take going forward) is rooted to the question of whether the financial system in Europe is in fact improving. It is true that the perception of the region’s health has indeed brightened; but sovereign entities ability to assess the debt markets and banks’ ability to withstand viscous credit markets has shown little meaningful and lasting improvement. So, while Spain and Austria may have successfully sold debt on the market and the weekly rollover from the ECB to cover the central bank’s purchase of government debt was more than covered; there is still a long way to go before bad debt is fully worked off and member economies are able to pay off their liabilities. This means sentiment could carry confidence further and drag gold down along with it; but eventually, the true condition of the region could once again bolster the metal’s appeal as an alternative asset.

Monitoring the divergence between short-term and long-term trends, we can see another reason for gold’s correction. The COT report reveals net long speculative interest on COMEX-based gold futures rose to its highest level this year (244,725) just this past week. The record high set in November is not much higher. As for daily turnover, the volume on the active futures contract is still relatively low at 137,000 contracts compared to this past Thursday’s 258,000 when the commodity issued a serious bearish break.

Spot Silver - $17.84 // $0.03 // 0.14%

Despite the remarkable performance from equities and the seemingly risk-based move from gold, silver put in for a relatively restrained performance Tuesday. The sessions range was well below the average and a virtually unchanged daily performance offered little in the way of progress. It seems last week’s massive bearish break will not easily revive a trend.


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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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