North American Commodity Update
Commodities - Energy
Despite Stable Risk Trends and Disappointing Data, Crude Manages a Sharp Rebound
Crude Oil (LS Nymex) - $ 82.66 // $ 0.99 // 1.21 %
The sharp tumble from oil Thursday was a corrective effort following a particularly aggressive upswing. However, volatility begets volatility; and the drive to end the week would put the market back in tune with the past two week's primary drive. Hovering just around $83, US oil is holding just off of five-month highs awaiting a catalyst (speculative or fundamental) to determine whether the bull trend will remain intact or a remarkable reversal is in the cards. Looking ahead to next week, there is a significant round of schedule data and commentary; but speculative interests have proven themselves to be flippant and at some times fully independent of traditional catalysts. Will this unusual digression persist?
Before looking ahead to next week, it is important to take note of the market's reaction to today's more influential fundamental developments. Heading into the session, top event risk was arguably the monthly nonfarm payrolls labor report from the US. Yet, despite the report of a worse-than-expected 95,000 cut in national payrolls, intraday oil price action showed little response to the news. That is remarkable on two accounts. First, the drop in activity has a distinct connection to overall growth expectations and therefore the demand for energy. What's more, this particular indicator is frequently a catalyst for risk appetite trends; and this particular commodity has a history of responding aggressively to shifts in investor sentiment. Why would traders ignore this favored volatility driver? A rational explanation is that the tepid recovery in the labor market is already well known; but capital markets are rarely so rational. Instead, the lack of reaction can likely be traced back to a distraction in speculating on the potential of an increase in stimulus by the Federal Reserve. Despite reasonable doubts over the efficacy of further monetary support, the growing consensus is that the central bank will step up its support of the market; and the recovery will subsequently charged alongside a leveraged influx of capital into the markets. Next week, we will likely see ongoing debate over the Fed's intentions and capabilities as central bank commentary is stepped up. As for scheduled releases, the FOMC minutes, retail sales and University of Michigan's survey of consumer confidence will fill in the voids.
In price action through the end of this week, we would see exactly what we would expect in a corrective move. Volume on the November Nymex futures contract dropped 17 percent from yesterday to 374,497. That being said, overall activity is still elevated. Traders should note that the November contract is losing liquidity quickly, however, as the market begins its early rollover to the next contract. In the meantime, the CFCT's net long speculative interest report reflected the larger bull trend. In the weekly reading, net longs surged 44 percent to 168,540 contracts - the highest reading since April 23 rd .
Crude Futures Chart ( Daily )
Chart generated using FXCM Strategy Trader
Commodities - Metals
Gold and Silver Put Some Momentum on their Rebound as Talk of Currency Wars Heats Up
Spot Gold - $1, 346.74 // $ 13.19 // 0.99 %
Something is certainly amiss when not only do equities rally in response to a disappointing US employment report; but gold advances alongside the risk-sensitive asset class. Gold made an effort Friday to retrace some of its aggressive losses through the previous session. An intraday bullish swing of 1.9 percent would both put in a temporary floor for support around $1,325 and more importantly reinforce the general strength of the market's two-month bull trend. It wouldn't take much to revive the metal's bullish charge considering all the factors are still in place (general concern about the financial system, a slowing global economy and a withdrawal of capital from the markets). Now all that is needed is a catalyst to get revive speculation.
Looking for a fundamental driver to gold's next move, we look to price action today to see the most probable catalysts. Directly after the release of the US employment report, gold would put in a sharp rally and subsequent reversal just like the S&P 500. Gold is still the consummate safe haven for the investing world; but this reaction falls back not on the indicator's impact on economic activity (indeed growth-sensitive markets like equities wouldn't likely rally on an unexpectedly sharp 95,000 net loss in payrolls if growth where the primary concern) but rather its influence over the Federal Reserve's decision to support the economy through stimulus expansion. Yet, for the precious metal, the underlying and overt influences that this reading had were both positive - hence the sustained advance where stocks backed off later in the US session. A stalled recovery and the depreciation of US assets through the possibility of a liquidity injection both send investors into the soothing arms of gold. Another notable driver that was initiated Friday and will carry over to next week is the discussion over a building 'currency war.' Direct intervention on the behalf of exchange rates (Japan and Brazil) and indirect means (ECB liquidity facilities, Fed permanent open market operations) all have the same effect in producing unpredictable volatility and driving investors away from this ever-present risk. While there are no official policy meetings scheduled next week, there are plenty of central bank officials expected to give their assessments of the economy and markets. On this point, we will continue to monitor the dollar specifically for its strong negative correlation with the precious metal as the US is currently at the forefront of the stimulus effort.
For trading activity, the reduced range for gold Friday would be mirrored in turnover. The December Comex futures contract saw a 32 percent drop in activity with 183,204 contracts traded. That being said, this is still an elevated level compared to the previous weeks' of otherwise moderate activity. This may indicate a greater potential for a volatile reversal or trend extension next week. In other news, the CFCT's commitment of traders figures show a modest 1 percent increase in net long holdings; yet it is just off November 27 th 's record high.
Spot Silver - $ 23.25 // $ 0.74 // 3.30 %
Like crude and gold, silver put in for a bounce Friday; but this commodities recovery was far more aggressive in percentage terms with a 3.3 percent climb for the second largest run in four months. That being said, the activity level matches the price action we have seen the previous week. That said, despite the push to new 30 years this past week, the CFTC reading dropped 6 percent.
Spot Gold Chart ( Daily )
Chart generated using FXCM Strategy Trader
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Written by John Kicklighter , Strategist
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