Crude oil rallied 2.2% last week, while stocks fell over 3.5%. Can this strong outperformance continue in the new week? Crude oil is close to flat in light Asian trade after rallying strongly on Friday. Prices broke through recent highs near $78.50 and are on track to test the psychological $80 resistance soon. As we have been harping on for several sessions now, crude oil is exhibiting some very significant relative strength versus other risk assets. The S&P 500 stock index fell almost 3.5% last week, but crude oil rallied 2.2%. This type of action is in sharp contrast to what happened in May and early June, when risk assets would move in lockstep with each other. The most significant factors that are driving this outperformance are the appreciation of the Chinese Yuan and concerns over Gulf of Mexico output. These two factors, while having no immediate consequence for supply and demand, will be incrementally supportive of crude oil over the medium term. In the event prices fail to breach $80, look for support at the key $75.50 level. Gold is steady after some whipsaw price action last week. Prices have largely regained last Monday’s losses and are deciding whether to make new all-time highs above the $1265 level. The story of this metal remains the same: long-term buyers may wish to hold off for a correction, while short-term traders should buy the dips with tight stops. Investment demand is showing no signs of abating, thus prices will keep heading higher for now. The inevitable correction will be brutal, but there is little clue as to when it will take place or from what level. Indeed, the correction could take place from much higher levels; there is no way to tell.

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