Stock markets finished stronger after another volatile weak with
especially banks suffering early on before policymakers’ attempts to
address the Eurozone fiscal crisis succeeded in reducing some of the
stress in the system. The dollar broke higher after having range traded
against the Euro for months and the near-term outlook now points towards
a stronger dollar which could dampen the demand for commodities as an
investment class, especially while the global economic outlook continues
to be clouded.
The Reuters Jefferies CRB Index traded lower on the week and is still
stuck around a flat performance for 2011. The energy complex had a good
week with Brent and WTI crude on top while the majority of commodities
saw negative performances with profit taking being the main focus in
particularly the agricultural and precious metals sectors after strong
rallies in previous weeks.
Gold Down but Not Out
Investors in gold took some money off the table as the stronger dollar and signs of political will to help the European debt crisis triggered the third 100+ dollar correction within a month. No sign of panic however has been detected and once again the sell-off met new buyers which helped stabilise prices. A continued rise in the dollar could call into question the chance of higher gold prices near term and traders could as a consequence be inclined to book profits faster than previously and ensure that a prolonged period of range trading could be on the cards. The biggest danger near-term however is the size of long positions held through Exchange Traded Funds and futures. Although it has come down by 220 metric tonnes from the August peak above 3,100 tonnes, a move below 1,700 on gold carries the risk of further long liquidation as fund managers look to book profits to offset losses elsewhere.
Investors in gold took some money off the table as the stronger dollar and signs of political will to help the European debt crisis triggered the third 100+ dollar correction within a month. No sign of panic however has been detected and once again the sell-off met new buyers which helped stabilise prices. A continued rise in the dollar could call into question the chance of higher gold prices near term and traders could as a consequence be inclined to book profits faster than previously and ensure that a prolonged period of range trading could be on the cards. The biggest danger near-term however is the size of long positions held through Exchange Traded Funds and futures. Although it has come down by 220 metric tonnes from the August peak above 3,100 tonnes, a move below 1,700 on gold carries the risk of further long liquidation as fund managers look to book profits to offset losses elsewhere.
Spot gold, source Bloomberg
WTI crude rise as release of strategic reserves ceases
The price of West Texas Intermediate rose for the fourth week running and is once again testing the 90 dollar level. The final 1 million barrels from a total of 30.6 million released from U.S. strategic reserves over the last eight weeks has now reached the market. During the same time we have seen inventories at Cushing draw for the seventh week in a row, thereby easing some of the supply overhang at the delivery point for NYMEX WTI crude, which in turn has seen the discount to Brent crude contract. Further upside on both crudes seems limited after the recent run higher as the potential for a stronger dollar and continued nervousness in stock markets should limit any further progress. We anticipate the two varieties to remain within a 10 to 15 dollar range with resistance at 91 on WTI and 117 on Brent.
Brent crude (front month), source Bloomberg
High corn and soybeans prices trigger demand destruction
The grain and soybean sector posted steep losses this week as focus shifted from the already known tight supply situation to concerns about weakening demand. The monthly “World Supply and Demand” report from the U.S. Department of Agriculture last Monday confirmed the tight supply situation but also highlighted the beginning of a slowdown in demand from exporters, ethanol producers and livestock feed. The liquidation of speculative long futures and options bets on corn and soybeans, which have increased by 50 percent since early August, also played a role in the sell-off this week. The sector had been viewed as immune to the risk adversity which hit other commodities over the summer. The stronger dollar combined with the shift in focus from supply to demand has changed that, at least for now, and could potentially mean that the highest price of the year for new crop corn and soybeans has already been seen.
Russia, which is expected to harvest 90 million tonnes of grains,
continues to undercut prices for large wheat tenders while forecasters
made an unexpectedly large increase to their estimate of global
inventories due to increased production estimates for Canada, Europe and
the FSU. All in all this added downside pressure to wheat prices on
both sides of the Atlantic with Chicago wheat trading back down to 7
dollars per bushel.
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