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Commodities Vulnerable as Bernanke Disappoints Hopes for Stimulus

Commodities Vulnerable as Bernanke Disappoints Hopes for Stimulus

Ilya Spivak, Head Strategist, APAC

Talking Points

  • Crude Oil, Copper Likely to Follow Stocks Lower as Bernanke Disappoints QE3 Hopes
  • Gold and Silver Expected to Fall as Fading Stimulus Bets Dent Inflation- Hedge Demand

Commodities are treading water in the hours ahead of Fed Chairman Ben Bernanke’s much-anticipated speech from at the Jackson Hole symposium. Traders hope the central bank chief will signal the intention of launching a third round of quantitative easing (QE3). On balance, the doves appear set for a disappointment, with an unequivocal nod toward QE3 seemingly unlikely.

Core PCE inflation – the Fed’s preferred measure of price growth – sits well above levels that pushed policymakers into deflation-fighting mode at the onset of QE1 and QE2. Medium-term inflation expectationsalso appear reasonably anchored having crept higher over recent weeks from worrisome levels in early June. Funding conditions have likewise noticeably improved. The Bloomberg US Financial Conditions Index has recovered to levels unseen since the immediate aftermath of QE2 and bond yields are near record lows. US economic data has also performed increasingly better relative to expectations.

Taken together, this means the Fed is likely to reserve QE3 as an available tool in its arsenal in the event that the mess in Europe triggers another credit crunch akin to the aftermath of the bankruptcy of Lehman Brothers in 2008. The fast approach of the so-called “fiscal cliff” likewise presents a possible scenario where another balance sheet expansion may be needed if US officials allow a jolt of arbitrary austerity to bludgeon the fragile recovery.

A disappointment on the stimulus front at Jackson Hole is likely to weigh on risk appetite, putting downward pressure on sentiment-linked crude oil and copper prices. Gold and silver are likewise expected to find themselves under pressure as demand for a hedge against a perceived debasement of the US Dollar via stimulus begins to ebb in earnest.

WTI Crude Oil (NY Close): $94.62 // -0.87 // -0.91%

Prices edged lower through support at 95.41, the February 2 low, after completing a Bearish Engulfing candlestick pattern below resistance at the 61.8% Fibonacci retracement (97.82). Sellers now aim to target the 50% Fib at 93.90, with a break below that targeting 92.51. The 95.41 level has been recast as resistance, with a break back above that exposing 97.82 anew.

Commodities_Vulnerable_as_Bernanke_Disappoints_Hopes_for_Stimulus_body_Picture_3.png, Commodities Vulnerable as Bernanke Disappoints Hopes for Stimulus

Daily Chart - Created Using FXCM Marketscope 2.0

Spot Gold (NY Close): $1655.60 // -0.90 // -0.05%

Prices edged lower putting in a Doji candlestick below trend-defining resistance at a falling trend line set from the August 23 2011 swing high, taking out initial support is at the 50% Fibonacci retracement (1658.55). Sellers now aim to challenge the 38.2% level at 1627.46. The 1658.55 level has been recast as resistance, with a break above that opening the door for test of trend line resistance now at 1668.89.

Commodities_Vulnerable_as_Bernanke_Disappoints_Hopes_for_Stimulus_body_Picture_4.png, Commodities Vulnerable as Bernanke Disappoints Hopes for Stimulus

Daily Chart - Created Using FXCM Marketscope 2.0

Spot Silver (NY Close): $30.44 // -0.31 // -1.01%

Prices edged lower as expected after putting in a Shooting Star candlestick below trend-defining trend line resistance set from the late-April 2011 swing top (30.89). Near-term support lines up at 29.70. Alternatively, a break above resistance marks a significant reversal and initially exposes the 32.00 figure and a horizontal pivot at 32.93.

Commodities_Vulnerable_as_Bernanke_Disappoints_Hopes_for_Stimulus_body_Picture_5.png, Commodities Vulnerable as Bernanke Disappoints Hopes for Stimulus

Daily Chart - Created Using FXCM Marketscope 2.0

COMEX E-Mini Copper (NY Close): $3.448 // -0.002 // -0.06%

Prices put in an Inverted Hammer candle above support at 3.438, pointing to indecision and hinting a move higher may be ahead. Near-term resistance lines up at 3.535, marked by the top of a channel set from the August 2 low and a range top in place since late May. Alternatively, a break below support targets the channel bottom, now at 3.403.

Commodities_Vulnerable_as_Bernanke_Disappoints_Hopes_for_Stimulus_body_Picture_6.png, Commodities Vulnerable as Bernanke Disappoints Hopes for Stimulus

Daily Chart - Created Using FXCM Marketscope 2.0

--- Written by Ilya Spivak, Currency Strategist for Dailyfx.com

To contact Ilya, e-mail ispivak@dailyfx.com. Follow Ilya on Twitter at @IlyaSpivak

To be added to Ilya's e-mail distribution list, send a note with subject line "Distribution List" to ispivak@dailyfx.com

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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