During the week we have seen the Greek crisis move up another notch with the yield on two year government bonds reaching 30 percent as investors worry that politicians will struggle to find a solution. The U.S. economy is heading for a soft patch while China continues to raise rates in an effort to halt rising inflation and Asian stocks have now had the longest weekly losing streak since 2004.
These and other unfriendly market news had investors heading for the exit with the Reuters Jefferies CRB index falling by 4% on the week.
Economic data over the next couple of months will show us whether the autumn rally of 2010 can be repeated but as a result of recent events all of the three major commodity indices are now showing little of no return year to date as shown below.
Oil stuck between future expectations and present reality
Oil markets turned lower during the week as a stronger dollar and the level of demand from the world’s two largest consumers was questioned together with the Greek debt crisis, which could threaten Europe’s economic recovery. Traders and investors who have been trading the market from the long side in anticipation of tightness over the coming months were once again, like in May, forced to reduce exposure.
Oil markets turned lower during the week as a stronger dollar and the level of demand from the world’s two largest consumers was questioned together with the Greek debt crisis, which could threaten Europe’s economic recovery. Traders and investors who have been trading the market from the long side in anticipation of tightness over the coming months were once again, like in May, forced to reduce exposure.
The current tightness is mostly noticed in Europe where refineries are struggling to find replacements for the loss of high quality Libyan oil. This unbalance has caused increased volatility between different oil qualities, most noticeably the spread between European produced Brent and U.S. WTI which on Monday traded above 21 dollars, a 10 dollar widening in just a matter of days.
The Middle East, especially Saudi Arabia has begun to increase supplies and with the failed OPEC meeting last week it will at least unilaterally try to alleviate some of the supply fears that still exist. Analysts are not convinced that the recent global slowdown is nothing but a soft patch with activity picking up again in the autumn. Economic data over the next few months will on that basis help determine whether demand will meet expectations or a prolonged slowdown could be on the cards.
Technically, WTI is the most exposed to further losses as the May low has been taken out with the 200 day moving average at 92.25 providing the next level of support before 91. Brent is holding up much better and should continue to trade within the established range between 110 and 120.
Gold range bound
The combination of an economic slowdown and a stronger dollar, which have hurt other commodities, have so far been offset by debt worries and inflation concerns leaving gold stuck in a relative tight range. The upside, however, seems capped for now as we are entering the period of seasonally low demand, which could trigger some scaling back of positions.
The combination of an economic slowdown and a stronger dollar, which have hurt other commodities, have so far been offset by debt worries and inflation concerns leaving gold stuck in a relative tight range. The upside, however, seems capped for now as we are entering the period of seasonally low demand, which could trigger some scaling back of positions.
Having tried and failed to break above $1,550 a correction could be lurking in the wings with the risk of 1,500 support being tested before additional support at 1,475.
Copper holding up on declining Chinese stocks
The price of copper received a boost earlier this week on news that Chinese copper stocks had seen a large reduction and they could return as a buyer after having been absent for a while. The second quarter is normally one with strong Chinese demand but their absence had led to speculation about an imminent slowdown in demand, it now turns out that local stocks had been put to use as high prices had caused international purchases to be postponed.
The price of copper received a boost earlier this week on news that Chinese copper stocks had seen a large reduction and they could return as a buyer after having been absent for a while. The second quarter is normally one with strong Chinese demand but their absence had led to speculation about an imminent slowdown in demand, it now turns out that local stocks had been put to use as high prices had caused international purchases to be postponed.
The LME base metal index is currently down more than 3% on the year as the current slowdown in economic activity has removed some of the previously strong demand. Copper, being a global indicator of growth, will probably find it difficult to make any major advances while traders contemplate whether this slowdown will stick or disappear in the autumn.
Crop friendly weather triggers fund liquidation
Grain markets are stuck at the bottom of the performance chart this week as a much improved weather forecast for the coming weeks, combined with general risk adversity, has triggered some fund liquidation.
Grain markets are stuck at the bottom of the performance chart this week as a much improved weather forecast for the coming weeks, combined with general risk adversity, has triggered some fund liquidation.
Corn which is facing some critically low stock levels after this planting season has also reacted negatively, given the high level of speculative involvement from the investment community. The crop prospects has improved over the past week as favorable growing conditions across the U.S. Midwest have removed some of the worst fears that have helped drive the market higher recently. Worries still persist though and corn prices, especially on the new crop contracts, should find support once this round of long liquidation has run its course. For only the second time in a decade July wheat trades at a discount to corn and this could potentially lead to some feed companies switching from corn to wheat thereby reducing some of the pressure on low ending stocks.
Tax break for ethanol producers in focus
U.S. tax breaks for ethanol producers have also come into question as the U.S. Senate in a 73-27 vote called for an end to this subsidy, which costs about $6 billion per year. The House of Representatives and the President, however, still favour the tax break but considering 40% of U.S. corn production goes towards ethanol this could make an impact should a removal or a reduction in the tax break be decided. Gasoline industry sources say that the ethanol business is now so mature that it does not need the tax credit of 45 cents per gallon of ethanol which is blended into gasoline.
U.S. tax breaks for ethanol producers have also come into question as the U.S. Senate in a 73-27 vote called for an end to this subsidy, which costs about $6 billion per year. The House of Representatives and the President, however, still favour the tax break but considering 40% of U.S. corn production goes towards ethanol this could make an impact should a removal or a reduction in the tax break be decided. Gasoline industry sources say that the ethanol business is now so mature that it does not need the tax credit of 45 cents per gallon of ethanol which is blended into gasoline.
In Europe the high quality Milling Wheat contract, traded in Paris, has seen a drop of 16% from the May peak as rain has finally reached key growing areas of Europe. The grain crop from the European Union has however already been damaged as dry spring weather has spoiled crops in the three biggest producers; France, Germany and the UK. This has lead to reductions in expected output from the region while Russian farmers are optimistic ahead of this autumn’s wheat harvest, and barring any surprises like last year’s drought, Russia could potentially reclaim its role as a key supplier to the global market.
