Markets

A Rally for Equities Helps Offset a Drop in US Manufacturing to Drive Crude through $80

Though fundamental winds were relatively light Monday, risk appetite was more than willing to take the lead for crude oil. The picture of price action on crude was almost an exact replica of the image of the Dow Jones.

North American Commodity Update

Commodities - Energy

A Rally for Equities Helps Offset a Drop in US Manufacturing to Drive Crude through $80

Crude Oil (WTI) $ 81 . 48 +$ 2 . 53 + 3 . 20 %

Though fundamental winds were relatively light Monday, risk appetite was more than willing to take the lead for crude oil. The picture of price action on crude was almost an exact replica of the image of the Dow Jones Industrial Average. Where the stock benchmark forced its way through 10,600; crude climbed above the closely watched $80-mark - a level that seems far more central as a psychological figure. Investor sentiment was charged through the morning hours of the New York session, though there was a lack of viable catalyst for any such move. The positive sentiment that percolated through the day seems to have originated from an otherwise disappointing report from China. According to a proprietary measure, manufacturing activity in the world's fastest growing economy unexpectedly contracted (represented by a reading below 50) for the first time in 16 months. Intuitively, this is a concerning development as it would suggest the largest importer of crude will throttle back on consumption. However, with investor confidence already on a positive bearing, a positive facet to this indicator draws more attention. Though speculative itself, many believe the drop in activity and the potential of a collapse in asset and lending markets in China will encourage officials to remove self-imposed dampeners to growth. Though a nice idea, they will not be able to simply 'allow' growth; but speculation can have its own convictions.

Tracking fundamental contributions through the rest of rest of the day, European manufacturing activity provided a better sounding board for investor optimism. Though a second reading, the Euro Zone's PMI reading maintained its impressive trajectory with a 56.7 reading. This particular report plays two distinct roles. First, it establishes potential demand for raw materials (including energy products) to fuel growth in one of the largest collective economies in the world. Furthermore, a positive growth reading for Europe further diminishes the threat of collapse for a region that has defined the risk for global financial markets for nearly six months now. Slightly tempering the good will the Euro Zone's figure would suggest, factory activity in the UK eased slightly from June - though the pace is still robust and supportive of a hearty pace of expansion. Furthermore, the US-based reading added to the disappointment. While the indicator wasn't as weak as projected (coming in with a 55.5 reading versus 54.5 expected), it was nevertheless the worst reading in seven months. A tempering in economic activity doesn't seem to discourage the ranks of speculators that see the opportunity to make capital gains. We will see how long that lasts.

Futures traders will take note of this past Friday's Commitment of Traders data from the CFTC covering the week ending July 27 th . According to the report, net speculative longs jumped 23 percent to 44,313 contracts - the highest level of bullish conviction since May 21 st . That being said, it isn't difficult to see such a significant percentage jump when the overall level is already depressed.

Commodities - Metals

Gold Edges Higher as Speculative Interests Distorted by Dollar Losses

Gold $ 1,183 . 28 +$ 2 . 25 +0. 19 %

Another day goes by where the gold further departs from its traditional role as the perennial safe haven asset. It should be said that the precious metal is still a unique and perhaps ideal alternative for the broader financial markets that frequently move with strong correlation (either positive or negative) to one or the other. This deviation for gold from the standard yield and growth-dependent securities has become more and more common in the past few months as the clarity and conviction of risk tolerance has dissipated (we are replacing clear trends for congestion). That being said, it seems gold is more sensitive to its own fundamental and technical bearings - to a point. From a technical standpoint, the commodity has bowed to the presence of the $1,165 pivot level that has developed price action for months now and subsequently confirmed a year-long rising trendline. Unless this level gives or the metal revives its climb towards $1,250, gold will maintain a posture of congestion.

From a fundamental perspective, this commodity's role as an alternative asset has left it in a relatively ambiguous position. As a safe haven, it seems gold's appeal should dissipate as equities climb. Taking stock of the most accessible asset benchmarks, the Dow Jones Industrial Average climbed 2 percent and cleared a significant resistance to trade at a two-and-a-half month high along the way. Savvy investors know, however, that the precious metal has its roots deeper than just a surface shift in speculative interests. That being said, gold's value as a harbor from risk conditions and exchange rate volatility seems to have also diminished. The euro is the favored representative of sovereign risk while the dollar is considered an alternative within its own asset group. That being said, EURUSD advanced to a new three-month high to further relief fear over an imminent collapse of the financial system that is sourced in the European Union.

Looking at the background activity figures, today's relatively mute performance was echoed by weak volume for the active futures contract. The 134,000 contract turnover was the weakest in two weeks and open interest for this particular asset was running at its lowest level since April 23 rd . Though the August contract expiration is a ways off, it seems the crowd is already rolling forward. From another angle (options), the CBOE Gold Volatility Index dropped to its lowest level in two-weeks (18.8 percent).

Silver $ 18 . 38 +$0. 37 + 2 . 03 %

Gold's lack of performance Monday was putting up little resistance to silver's progress. The metal rallied to an intraday month-high on its strongest back-to-back advance in months. Climbing more than 2 percent through the later US session hours, the commodity has easily cleared the $18 threshold. For futures traders, today's price action was matched by another solid performance in volume. For the liquid September COMEX contract, a turnover of 34,125 would slightly outpace Friday's activity. Open interest on this particular contract seems to have already topped off and has been on the slow decline since the beginning of July.

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Written by John Kicklighter, Strategist

To receive John's reports via email or to send Questions or Comments about an article; email jkicklighter@dailyfx.com

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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