Crude Oil, Gold to Recover as Soft US Jobs Report Stokes Dovish Fed Bets
Commodities – Energy
Oil to Follow Stocks Correction Higher
WTI Crude Oil (NY Close): $99.80 // -9.44 // -8.64%
Crude is pushing sharply lower, with prices poised to take out support at the midline of a rising channel that has guided them higher since February 2009. Initial support lines up at $92.98, followed by the channel bottom now at $88.12. Taken together, this is a formidable barrier and a bounce higher seems likely before it is taken out in earnest. Initial resistance lines up at the $100/barrel figure.
Risk sentiment remains in focus, with the WTI contract moving in tandem with the MSCI World Stock Index. This puts the onus on April’s US employment figures. Expectations call for the world’s top economy to add 185,000 jobs in April – marking the smallest increase in three months – while the Unemployment Rate holds steady at 8.8 percent.
Traders have been selling risky assets and buying the US Dollar this week, apparently look ahead to rising US yields after the Federal Reserve firmly pledged to end QE2 in June at last week’s FOMC meeting. It seems reasonable that a soft employment figure may be just the catalyst to engineer some profit-taking on risk-averse positions, with shares as well as risk-correlated assets including crude recovering while the greenback retraces some of its advance.
Commodities – Metals
Spot Gold (NY Close): $1474.30 // -42.02 // -2.77%
Prices followed up a bearish Dark Cloud Cover candlestick pattern with a drop to support at $1474.25, the 38.2% Fibonacci retracement of the rally from January’s swing low, a barrier reinforced by a rising trend line set from the same point. A corrective bounce from here sees initial resistance at $1513.54, the 23.6% Fib, while a break lower exposes the 50% level at $1442.50.
Inflation expectations remain in focus, with prices firmly anchored to one-year breakeven rates (the spread between yields on regular and inflation-linked Treasury bonds of equal maturities). Needless to say this points the spotlight on April’s US jobs report. Perversely, a relatively soft outcome may actually see price growth bets move higher, taking the yellow metal along for the ride, as traders interpret lackluster labor market growth as a sign that the Federal Reserve may slow to removing stimulus measures beyond allowing QE2 to expire in June as promised last week.
Spot Silver (NY Close): $34.70 // -4.64 // -11.80%
Prices have taken out support $37.39, the 76.4% Fibonacci retracement of the rally from mid-March, with sellers now testing support near the 3/15 low at $33.56. A break lower beyond this barrier exposes $31.24, the January 3 high. The 76.4% level has been recast as near-term resistance.
As with gold, a strong correlation with the one-year breakeven rate hints that a soft US jobs report may help to engineer a bounce as traders temper hawkish Federal Reserve expectations. The gold/silver ratio has soared to the highest in over three months, suggesting the cheaper metal will continue to underperform its more expensive counterpart.
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