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Crude Oil, Gold to Fall as Euro Zone Debt Fears Compound Risk Aversion

Crude Oil, Gold to Fall as Euro Zone Debt Fears Compound Risk Aversion

2011-05-23 11:59:00
Ilya Spivak, Sr. Currency Strategist
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Commodities – Energy

Crude Oil to Fall as Risk Aversion Heats Up

WTI Crude Oil (NY Close): $99.49 // +1.05 // +1.07%

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.

A firm correlation between the WTI contract and the S&P 500 points to weakness, with stock index futures tracking the US benchmark sharply lower ahead of the opening bell as the larger risk-averse theme emerging from the beginning of the month and centered around the expiration of QE2 is compounded by renewed Euro Zone sovereign risk fears. A deluge of negative developments from the currency bloc has hit the tape: S&P lowered its credit outlook for Italy to “negative”; Fitch lowered its rating on Greece; and Spain’s ruling Socialist party suffered a defeat in local elections as the public lashed out at the budget cuts that had kept the Euro Zone’s fourth-largest economy off crisis watch until now. Needless to say, traders now fear this is a sign of things to come, with a national-level electoral turnaround that undoes austerity threatening to plant the seeds of sovereign stress in a country too big to be bailed out within the context of the EFSF bailout fund as it stands.

Sizing up the economic calendar, the Chicago Federal Reserve’s National Economic Activity index is the only bit of scheduled event risk, with expectations calling for a shallow decline in April.

Crude_Oil_Gold_to_Fall_as_Euro_Zone_Debt_Fears_Compound_Risk_Aversion_body_Picture_3.png, Crude Oil, Gold to Fall as Euro Zone Debt Fears Compound Risk Aversion

Commodities – Metals

Gold, SilverContinue to Follow S&P 500 Lower

Spot Gold (NY Close): $1512.30 // +18.95 // +1.27%

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. Initial downside targets line up at $1462.05 and $1444.00.

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 grips the markets to start the trading week. More of the same appears likely throughout the week as renewed unwinding of QE2-linked, USD-funded positions is overlaid with the reemergence of acute sovereign stress in the Euro Zone.

Crude_Oil_Gold_to_Fall_as_Euro_Zone_Debt_Fears_Compound_Risk_Aversion_body_Picture_5.png, Crude Oil, Gold to Fall as Euro Zone Debt Fears Compound Risk Aversion

Spot Silver (NY Close): $35.08 // +0.07 // +0.19%

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_Euro_Zone_Debt_Fears_Compound_Risk_Aversion_body_Picture_4.png, Crude Oil, Gold to Fall as Euro Zone Debt Fears Compound Risk Aversion

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