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Crude Oil, Gold to Fall as S&P 500 Index Futures Point to Risk Aversion

Crude Oil, Gold to Fall as S&P 500 Index Futures Point to Risk Aversion

2011-05-20 12:45:00
Ilya Spivak, Sr. Currency Strategist
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Commodities – Energy

Oil Prices Poised to Decline Amid Risk Aversion

WTI Crude Oil (NY Close): $98.44 // -1.66 // -1.66%

Prices continue to consolidate near the 23.6% Fibonacci retracement of the drop from the May 2 high at $99.41. On balance, anything shy of a daily close above the 50% mark at $104.73 amounts to consolidating within an overall bearish structure, with a break below $94.65 needed to mark the beginning of the next leg lower.

An empty US economic calendar leaves risk sentiment trends as the pure driver of the crude prices. Indeed, the correlation between the WTI contact and the S&P 500 remains near the strongest levels in five months. With that in mind, stock index futures tracking the go-to US equity benchmark are taking heavy losses, down 0.3 percent ahead of the opening bell on Wall Street and hinting a bout of risk aversion will bring oil lower into the week-end.

Crude_Oil_Gold_to_Fall_as_SP_500_Index_Futures_Point_to_Risk_Aversion_body_Picture_3.png, Crude Oil, Gold to Fall as S&P 500 Index Futures Point to Risk Aversion

Commodities – Metals

Gold to Follow S&P 500, Other QE2-Linked Assets Lower

Spot Gold (NY Close): $1493.35 // -3.80 // -0.25%

Gold continues to consolidate between $1519.55, the 50% Fibonacci retracement of the drop from the May 2 high and a rising trend line set from late January. Piercing this downside barrier would amount to a material, medium-term trend change, opening the door for protracted gold weakness over the coming weeks. Short term support and resistance line up at $1489.19 and $1505.98, marking the 23.6 and 38.2 percent Fibonacci retracements of the decline from the May 2 high.

As with oil, gold prices remain firmly correlated with the S&P 500, with index futures hinting the yellow metal is set to follow the spectrum of risky assets lower as risk aversion returns into the week-end. Newswires are attributing pre-open bearish cues to disappointing earnings forecasts from clothing retailers Gap Inc and Aeropostale Inc. We suspect the larger issue at work is the passing of the FOMC minutes release earlier this week. The report reinforced pre-existing expectations about the direction of US monetary policy, opening the door for renewed selling of risky assets whose rallies over recent months had been driven (at least in part) by cheap funding through QE2 ahead of the program’s expiry in June.

Crude_Oil_Gold_to_Fall_as_SP_500_Index_Futures_Point_to_Risk_Aversion_body_Picture_4.png, Crude Oil, Gold to Fall as S&P 500 Index Futures Point to Risk Aversion

Spot Silver (NY Close): $35.01 // -0.10 // -0.27%

Prices continue to consolidate below $36.44, the 23.6% Fibonacci retracement of the 4/25-5/6 decline. A push higher through this barrier exposes the 38.2% level at $38.99. Near-term support lines up at $32.32.

Correlations with the S&P 500 remain heavy here as well, hinting silver remains anchored to broad-based sentiment trends. As we mentioned yesterday, the gold/silver ratio has carved out a significant inverse relationship with the benchmark stock index, suggesting the cheaper metal outperforms in “risk-on” markets and underperforms amid risk aversion (such as what is being hinted at today).

Crude_Oil_Gold_to_Fall_as_SP_500_Index_Futures_Point_to_Risk_Aversion_body_Picture_5.png, Crude Oil, Gold to Fall as S&P 500 Index Futures Point to Risk Aversion

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