Stock and commodity markets continue to focus on the impact of weak
global growth conditions and the EU debt crisis. The dollar moved back
to its strongest levels in months benefitting from the Swiss currency
peg, worries ahead of the 9/11 ten year anniversary and an European
Central Bank more concerned about weak growth than inflation.
Swiss currency floor
Foreign exchange markets lit up this week with news that the Swiss National Bank all but made good on persistent rumours that it would peg the Swiss Franc to the Euro in order to halt the dramatic appreciation of the currency which had begun to hurt the Swiss economy. The line is now drawn at 1.20 versus the Euro at which level the SNB will buy Euros at whatever quantity required to hold the CHF.
Foreign exchange markets lit up this week with news that the Swiss National Bank all but made good on persistent rumours that it would peg the Swiss Franc to the Euro in order to halt the dramatic appreciation of the currency which had begun to hurt the Swiss economy. The line is now drawn at 1.20 versus the Euro at which level the SNB will buy Euros at whatever quantity required to hold the CHF.
..and the potential dollar/commodity impact
This move could strengthen the dollar with the SNB likely
wanting to buy other currencies than Euros, of which it currently holds
55 percent, in order to maintain a diversified mix of currencies in its
reserves. With the dollar being the most liquid of the pack it could now
have found a friendly central bank. Asian Central Banks have been
selling dollars against Euros for months. All eyes will be on EUR/USD as
a break of key levels would open the way for a substantial move
higher. It will be interesting to follow from a commodity perspective as
a stronger dollar removes some support for the asset class.
The Reuters Jefferies CRB index lost one percent over the week with most commodities bar a few being in the red.
Oil focus on supply disruptions, Obama job plan and hurricane Nate
Crude oil markets quickly found support this week after another sell off. The recovery was driven by a bounce in equity markets and hopes that President Obama’s job creation plan could stimulate growth. But more importantly near-term is the tightness in the spot market with the loss of Libyan oil continuing. We also have outages in Nigeria, Syria and the North Sea adding up to lower-than-expected production which so far has helped offset reduced demand caused by the economic slowdown. Further, producers in the Gulf of Mexico have had to evacuate workers once again ahead of Tropical Storm Nate which is expected to become the third hurricane this season. Cushing not spilling over
Crude oil markets quickly found support this week after another sell off. The recovery was driven by a bounce in equity markets and hopes that President Obama’s job creation plan could stimulate growth. But more importantly near-term is the tightness in the spot market with the loss of Libyan oil continuing. We also have outages in Nigeria, Syria and the North Sea adding up to lower-than-expected production which so far has helped offset reduced demand caused by the economic slowdown. Further, producers in the Gulf of Mexico have had to evacuate workers once again ahead of Tropical Storm Nate which is expected to become the third hurricane this season. Cushing not spilling over
During the week the spread between WTI and Brent crude reached a
new record high of 27 dollars with most of the above supply issues
impacting Brent more than WTI. One of the major reasons for this
dislocation has been the belief that increasing storage levels at
Cushing, the delivery hub for NYMEX WTI crude, would put downside
pressure on prices. The chart below shows, however, that storage levels
have been falling since May and currently stands at levels last seen in
November 2010 - at which time the spread was trading below one dollar.
What is the correct price of Oil?
One must conclude that the current spread is more related to the supply issues currently affecting Brent crude. This can also be seen by the Brent oil curve moving into a very steep backwardation with spot price trading more than two dollars higher than Brent for delivery in 3 months time. Should the bottlenecks begin to disappear we can expect prices to adjust lower within the established $118 to $108 range. The price of WTI is arguably cheep on the basis that Cushing is not overflowing, but until we see a pick-up in economic activity investors’ negative views will be expressed through WTI crude.
One must conclude that the current spread is more related to the supply issues currently affecting Brent crude. This can also be seen by the Brent oil curve moving into a very steep backwardation with spot price trading more than two dollars higher than Brent for delivery in 3 months time. Should the bottlenecks begin to disappear we can expect prices to adjust lower within the established $118 to $108 range. The price of WTI is arguably cheep on the basis that Cushing is not overflowing, but until we see a pick-up in economic activity investors’ negative views will be expressed through WTI crude.
Gold sold off and found buyers again
Gold reached a new nominal record at $1,921 a barrel but, again, the immediate response was a $100+ sell off highlighting the increased level of volatility seen recently. The drop below $1,800, however, triggered new buying, especially out of the Far East, and a quick bounce followed. This two way battle will continue over the coming weeks but the overall direction still points higher towards 1,970 and potentially the magical 2,000 level. Hedge funds and ETF investors have continued to reduce long exposure over the last four weeks and it could be a sign of rally fatigue but, as mentioned above, the demand on setbacks looks solid for now.
Gold reached a new nominal record at $1,921 a barrel but, again, the immediate response was a $100+ sell off highlighting the increased level of volatility seen recently. The drop below $1,800, however, triggered new buying, especially out of the Far East, and a quick bounce followed. This two way battle will continue over the coming weeks but the overall direction still points higher towards 1,970 and potentially the magical 2,000 level. Hedge funds and ETF investors have continued to reduce long exposure over the last four weeks and it could be a sign of rally fatigue but, as mentioned above, the demand on setbacks looks solid for now.
Over the last five years gold has tended to correct aggressively each
time it moved further than 20 percent away from its 200 day moving
average. This could be the reason why gold has been struggling to hold
onto gains above 1,900 recently indicating that further upside progress
will be slower than during the previous couple of months.
UN FAO food price index stable in August
The monthly Food Price Index from the Food and Agriculture Organization of the United Nations averaged 231 points in August and was nearly unchanged from July, but 26 percent higher than a year ago. The index of 55 food commodities hit an all time high of 238 points back in February on the back of steep price rises in sugar. Over the last few months prices have stabilised but world food prices are expected to remain elevated this year as stockpiles will be running low after a difficult growing season. The cereal index which includes wheat, corn and rice, rose 2.2 percent in August, primarily on the back of the rise in international prices of rice and corn. The FAO said: “A policy change in Thailand, the world’s largest rice exporter, which is set to increase the purchasing price from farmers to above market levels, served to further support this increase. Corn prices also rose sharply in August, reflecting further deterioration in this year’s crop prospects in the United States”
The monthly Food Price Index from the Food and Agriculture Organization of the United Nations averaged 231 points in August and was nearly unchanged from July, but 26 percent higher than a year ago. The index of 55 food commodities hit an all time high of 238 points back in February on the back of steep price rises in sugar. Over the last few months prices have stabilised but world food prices are expected to remain elevated this year as stockpiles will be running low after a difficult growing season. The cereal index which includes wheat, corn and rice, rose 2.2 percent in August, primarily on the back of the rise in international prices of rice and corn. The FAO said: “A policy change in Thailand, the world’s largest rice exporter, which is set to increase the purchasing price from farmers to above market levels, served to further support this increase. Corn prices also rose sharply in August, reflecting further deterioration in this year’s crop prospects in the United States”
The price of U.S. rough rice has risen by one third over the last two
months, still some 26 percent below the peak in 2008 which caused food
riots across Asia. Meanwhile corn prices remain elevated with a highly
anticipated U.S. crop report on Monday expected to confirm worries that
the crop size and quality of the upcoming harvest have suffered due to a
hot and dry summer.
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