The outlook for global growth is deteriorating, partly as a
consequence of rising food and energy prices, and risk appetite has
suffered as a consequence.
Carnage in currency and bond markets spilled over to equities and
commodities this week. The world’s most followed equity index, the
S&P 500 index, dropped below its 200-day moving average erasing all
of its 2011 gains in the process. Investors looking for safety scrambled
into the Swiss Franc and Yen before the central banks of the two
nations had enough and announced measures to curb further currency
appreciation. In commodities gold made a new nominal record high as
investors and central banks continued to increase exposure to the yellow
metal.
The commodity sector got hammered with the three major indices moving
back into negative territory for the year with the base metals and
energy sectors especially suffering heavy losses. The impact on global
activity of a 40 percent rise in Brent crude from the 2010 average is
now clear and the fragile economic recovery has not been able to cope
with the price rises over the past six to nine months. Adding to this
the debt crisis in U.S and especially Europe commodities in general will
have a bumpy ride in the weeks ahead.
As the European debt situation continues to frighten investors they
now also have to contemplate the risk of a double-dip recession in
America. A third round of quantitative easing, which up until recently
was dead and buried, could resurface thereby supporting tangible assets
such as commodities just like it did throughout the second half of 2010.
The Reuters Jeffries CRB index is down nearly four percent on the
week with just a few markets showing gains either from safe haven flows
or from weather related issues.
Going for gold
The price of gold reached a new nominal high at USD 1,681 as safe haven flows continue to support the yellow metal. It was not however immune to the selling elsewhere. The accelerating sell off-in S&P 500 on Thursday led to a quick 40 dollar retracement in gold before recovering. Silver fared worse as the 35% sell off earlier this year has left investors much less inclined to hold on to positions for longer. On Thursday this resulted in a seven percent sell-off leaving silver in negative territory on the week.
The price of gold reached a new nominal high at USD 1,681 as safe haven flows continue to support the yellow metal. It was not however immune to the selling elsewhere. The accelerating sell off-in S&P 500 on Thursday led to a quick 40 dollar retracement in gold before recovering. Silver fared worse as the 35% sell off earlier this year has left investors much less inclined to hold on to positions for longer. On Thursday this resulted in a seven percent sell-off leaving silver in negative territory on the week.
Technically gold reached the top end of the channel in which it has
confided since October 2008 and in the short term that could provide
some resistance with support now seen at 1,630 followed by 1,600.
Oil prices hurt by economic slowdown
The price of WTI crude dropped to the lowest level in eight months as the uptrend from the 2009 low got broken. Having lost more than one quarter from the May high it is now only some five dollars above the 2010 average at 80 dollars. Meanwhile, Brent crude found support below 105 for the third time this year with the spread to WTI holding firm above 20 dollars.
The price of WTI crude dropped to the lowest level in eight months as the uptrend from the 2009 low got broken. Having lost more than one quarter from the May high it is now only some five dollars above the 2010 average at 80 dollars. Meanwhile, Brent crude found support below 105 for the third time this year with the spread to WTI holding firm above 20 dollars.
A slowing U.S. economy and general risk adversity caused by the stock
market sell-offs had investors scaling back long positions in
anticipation of reduced demand for oil in the months ahead. It certainly
looks as if consumers have been hurt more than expected by higher oil
prices during the past six months and the International Energy Agency
stands vindicated in its decision to pump strategic reserves into the
system. Tight fundamentals however should continue to support prices and
prevent a major sell-off from current levels despite the continued
elevated level of speculative long positions that exists, especially in
WTI crude
Grains: Modest corrections compared to other commodities
Temperatures across the U.S. have been seasonally higher than normal during the month of July. This has caused the quality of the crops to deteriorate, thereby keeping prices supported despite the general level of risk adversity caused by weaker economic growth. The price of December corn, which reflects the new crop, revisited the June highs. Only a change towards more crop friendly weather will prevent prices from moving higher still as a certain level of demand destruction is required to prevent expected tightness of stock in the months ahead.
Temperatures across the U.S. have been seasonally higher than normal during the month of July. This has caused the quality of the crops to deteriorate, thereby keeping prices supported despite the general level of risk adversity caused by weaker economic growth. The price of December corn, which reflects the new crop, revisited the June highs. Only a change towards more crop friendly weather will prevent prices from moving higher still as a certain level of demand destruction is required to prevent expected tightness of stock in the months ahead.
The price of new crop soybeans has been trading sideways since
December roughly in a 12.90 to 14.10 dollar per bushel range. The
weather during August is more important for the development of the bean
as it is planted later and has a different maturity cycle than corn. A
continuation of dry hot weather could therefore add some upside pressure
to this crop as well. For now though near-term weather forecasts
suggest that rain and more normal temperatures will return during the
next couple of weeks. On that basis the established range should prevail
but look out for the production and supply/demand report from the
United States Department of Agriculture due August 11.
Meanwhile, the price of wheat remains stuck at the lower end of its
recent range as Russia has ramped up exports in order to regain the
market share lost during the export ban that lasted until July 1. Russia
may export 20 to 25 million tonnes of grain this season according to
the Grain Union President thereby offsetting lower production in Germany
and France. Dry spring weather has been replaced by wet August weather
which literally has left combine harvesters stuck in the mud. Higher
corn prices however will support wheat prices as this could force an
increase in corn to wheat feed substitution.
Base metals pricing in lower demand
Copper together with the other base metals fell to a five-week low after the biggest weekly drop since March. The LME base metal index fell 5.5% while a basket of European basic resource companies lost more than twice that on concerns that a faltering global economy will curb demand in the months ahead. Not helping copper either were news that workers at the world’s largest copper mine, Escondida in Chile had accepted an improved offer and would return to work after a two week strike over bonuses and benefits.
Copper together with the other base metals fell to a five-week low after the biggest weekly drop since March. The LME base metal index fell 5.5% while a basket of European basic resource companies lost more than twice that on concerns that a faltering global economy will curb demand in the months ahead. Not helping copper either were news that workers at the world’s largest copper mine, Escondida in Chile had accepted an improved offer and would return to work after a two week strike over bonuses and benefits.
Sugar: Speculative longs heading for the exit
Sugar suffered heavy losses this week on a combination of expectations for a sharp increase in Northern Hemisphere production and lack of any supportive news from Brazil. Reduced production in Brazil, the world’s largest producer, helped the price of sugar reach a high of 31.68 cents per pound back in July before succumbing to profit taking. Since late May the speculative long position in sugar has risen strongly and this is now causing long liquidation at a time where trade houses have been reported as sellers as well.
Sugar suffered heavy losses this week on a combination of expectations for a sharp increase in Northern Hemisphere production and lack of any supportive news from Brazil. Reduced production in Brazil, the world’s largest producer, helped the price of sugar reach a high of 31.68 cents per pound back in July before succumbing to profit taking. Since late May the speculative long position in sugar has risen strongly and this is now causing long liquidation at a time where trade houses have been reported as sellers as well.
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