North American Commodity Update
Commodities - Energy
A Six-Month High From Crude Denotes a Clear Expectation for Fed Stimulus
Crude Oil (LS Nymex) - $ 83.90 // $0.95 // 1.15 %
US oil put in for a second consecutive rally Tuesday; and subsequently cleared significant levels of technical resistance. The levels surpassed alone are remarkable. Not only did the benchmark commodity break the ceiling on its descending trend channel; but the swell would actually push crude to its highest intraday level and close in six months. However, this progress is even more incredible when we set it against the backdrop of impending event risk. The presence of Wednesday's Fed rate decision is not missed by any trader. That is easily established by the fact that the S&P 500 has maintained some level of congestion for more than three weeks now and similar lack of direction from EURUSD. This unique drive alleviates significant breakout pressure that would have simply built up had congestion held. On the other hand it also sets the tone for a high level of volatility, which can more easily jump start a meaningful trend (rather than expend all its energy on the initial breakout).
For fundamental drivers Tuesday, there was relatively little to go on for this energy market rally. From a macroeconomic perspective, the data on deck was extremely light. The UK MPI construction report was the only indicator with an indirect influence on price action; and Wednesday's round of services activity PMIs is far more appropriate to establish supply-and-demand expectations. The industry-based API US inventory figures could have contributed to the rally; but it certainly wasn't the source. The report showed the biggest drop in stockpiles (4.1 million) since July. For the upcoming Department of Energy figures, the most influence the data will have would be as a compliment to more influential trends. What is the more meaningful driver? Risk appetite trends. The FOMC rate decision will consume investors from all markets. The impact this policy outcome will have on crude will be through its leverage over investor optimism can be fortified with the implicit guarantee offered by government support. That said, the market has efficiently priced in a substantial expansion of stimulus; so there is room for the event to be a disappointment even with additional quantitative easing.
For trading activity, we see that despite the follow up rally to a six-month high, volume on the December Nymex futures contract actually dropped 27 percent on the day to a two-week low 261,192 contract - a drop in activity with an underlying trend is typically a discouraging sign for follow through. Another interesting note is the increase in the differential between price of the active nearby futures contract and the two-year deferred (contango) to a two year low.
Crude Futures Chart ( Daily )
Chart generated using FXCM Strategy Trader
Commodities - Metals
Will a Flood of Stimulus Weigh Gold on the Risk Surge or Leverage its Alternative Value?
Spot Gold - $1 ,357.45 // $ 3.60 // 0.27 %
Having pulled up from the floor of its medium-term, rising trend channel this past week; gold reduced the threat of an imminent breakout. That was a meaningful price development given the influence this week's top event risk will have over risk appetite and long-term capital diversification. The event that the dollar and capital markets in general have been waiting for - the FOMC rate decision - is upon us; and the potential impact this individual indicator can have on the precious metal is just as significant as it would be for the US dollar. So, though gold may not be right on its prominent trendline; volatility could very well force a breakout for an overdue reversal or revive a larger bull trend onto record highs.
For Tuesday's price action, gold was little moved. Under normal circumstances, this would be somewhat unusual considering the dollar was under significant pressure through the day - notable enough to push it to a two-week low. Going forward, the performance of the greenback is still an important analysis point for metals traders; but the source of the fundamental activity runs deeper than just playing the alternative to this liquid fiat. The central bank's decision to expand stimulus - and by what extent - will prove a defining driver for the asset itself. Increasing stimulus for the US economy/markets has a few effects. First it dilutes the value of the currency, which naturally drives up those securities normally priced in dollars. Furthermore, the increased obligation by the US central bank to fortify speculators' investments (a side effect even if the aim is to lower rates) will lower the perceived creditworthiness of the nation and the assets that are based upon it. The broader divergence between risk appetite and true fundamental health, however, has the greatest appeal. The steady advance in ETF holdings through the past year to record highs shows that there is a growing demand for the precious metal when risk appetite seems to be on the rise. This unusual correlation (historically speaking) can be traced back to the separation of speculative opportunism and actual investment. Capital aimed at making short-term gains on appreciation that is backed by the support of stimulus is of a different sort than funds that are placed in a market for long-term appreciation. There is plenty of evidence to suggest that the advance in markets to this point is heavily weighted in the prior type; and therefore is highly exposed to an eventual correction (unwinding). We will see how much confidence the FOMC supplies with its rate decision. An inline or smaller than expected stimulus package can actually deflate the optimism that was priced in and encourage a dollar recovery - which would be a big push towards forcing a gold reversal.
As for trading interest, we note that volume on the nearby Comex futures contract dropped 14 percent from the previous day to 109,542 contracts. This is the lowest level of turnover since October 11 th - to be expected ahead of big event risk.
Spot Silver - $ 24.91 // $0.23 // 0.93%
Once again, silver is a standout. While gold has held a relatively tight range the past 36 hours, its cheaper counterpart has actually advanced to a fresh 30 year high on the close. This likely can be traced to the commodities ties to risk appetite trends, which fill in for price action. As for activity levels, volume on the December futures contract dropped 25 percent to the lowest since October 4 th .
Spot Gold Chart ( Daily )
Chart generated using FXCM Strategy Trader
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Written by John Kicklighter , Strategist
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