Financial markets including commodities spent most of the week recovering from the surprise weakness witnessed in the recent US jobs report. US stocks dropped to a one-month low and in Europe the dramatic divergence between different countries continued. The divergence in the performance so far this year between the DAX index in Germany and the IBEX index in Spain is really stunning and currently stands at 27 percent. Spain especially is now the focus in the prolonged European debt crisis with the yield on its 10-year government bonds reaching 6 percent, more than four percentage points higher than its German equivalent.
Meanwhile, the dollar continues on its road to nowhere with the EURUSD, the world’s most traded currency pair, once again finding support ahead of the important 1.3000 support level. The euro buying – dollar selling that followed once the support level was confirmed generally helped commodities to recover some of their poise late in the week.
However, the near-term outlook for global growth, especially in China where Q1 growth eased to a three-year low, points towards some softness and could limit the upside potential for commodities during this quarter. The China news triggered some selling of industrial metals, especially copper which at one point came close to critical support levels before bouncing as the dollar weakened. Gold did receive a boost after support held once again and from a forecast that 2,000 dollars could be seen before 2013 while oil prices spent most of the week testing the strength of support.
Gold looks towards the FED – again
Traders in the gold market have been wrong-footed on several occasions during the last couple of months as the main price mover has been the constant on/off talk about further US quantitative easing. The recent weakness in US job growth has once again turned the focus towards the potential for more liquidity being provided. Support was also provided by GFMS, one of the world’s leading consultancies in precious metals. In its Gold Survey 2012 it forecast that gold could move above $2,000 by year-end or early 2013 before peaking some time during 2013.
The reasons behind the continued rally are well known, such as: concerns over the Eurozone debt crisis, negative real yields and the prospect of more US monetary easing. The peak in 2013 and subsequent retracement will occur once the prospect for higher US rates becomes a reality. GFMS also interestingly sees supply from mining and scrap continuing to rise faster than demand for jewellery and other goods leaving the investment community in charge of driving demand forward. It sees a point in time where not enough investors will step up and that could signal the turn in the market. The near-term floor in the market is called at 1,530 but will only be met during a risk-off scenario where gold also could get dragged lower for a while.
Technical and momentum traders also found comfort in the fact that the 55-week moving average at 1,647 held its ground leaving the trend line support from 2008 at 1,625 unchallenged. In the days ahead resistance at 1,697 is unlikely to be broken with many investors having a lukewarm and indifferent attitude to gold, given the many false trade signals that have been generated over several months now. One could however also argue that this bodes well should the upside be broken as many hedge funds have left themselves underexposed and would have to react if the technical picture turns more positive.
Economic slowdown hurts industrial metals
Following a strong rally in January, industrial metals caught a bit of a "cold" on emerging signs of slowing economic activity in China. Having traded sideways since early February things have been turning progressively negative during the last couple of weeks, culminating in the weaker than expected jobless report from the US last Friday which further reduced the outlook for economic activity and subsequent demand.
The main culprit however has been China and recent strong domestic inventory builds of construction related commodities like copper and steel have created concerns about the degree of the slowdown. Considering China in recent years has represented more than 40 percent of global consumption and more than 50 percent of global consumption growth of the major industrial metals the outlook for this country holds the near-term key to price developments.
Copper, the most widely traded of the metals, has fallen through technical levels both in London and New York and is currently looking for support. With fears about a hard landing in China and softer economic US data over the next quarter the price may be struggling to reassert itself. Technically traders are looking out for support at 8,000 USD/MT on the LME in London and USD 3.6 USD/lb. on COMEX in New York.
While we expect the demand for copper to be relatively soft problems with supplies are likely to keep prices from falling much further. Output from some of the major producing countries has disappointed due to a variety of reasons such as labour disputes, adverse weather, technical issues and a general falling ore grade as some of the major mines have reached maturity
Verbal intervention continues in oil markets
Saudi Arabia, the world’s biggest oil exporter and currently the only holder of any spare capacity, once again has expressed its discontent with current prices above 120 dollars. Saudi Arabia’s oil minister Naimi said that there is no shortage of supply, with its inventories in the Kingdom and around the world, currently being full. He added that Saudi Arabia is determined to bring down prices and can produce more oil if requested, despite already producing 10 million barrels per day, the highest level for three decades.
The International Energy Agency also did its best to calm oil markets when it announced that the oil market had broken a two-year cycle of tightening supply conditions. It sees demand growth softening at a time where Saudi Arabia has been increasing output. So where is all the oil going if it’s not towards consumption? The IEA thinks that much of the extra oil has been stockpiled both on land and at sea by especially many emerging economies, which have low forward cover and have therefore increased strategic reserves to protect against potential supply disruptions.
Hopes rising ahead of meeting with Iran
The P5+1 group consisting of China, Russia, Britain, France, the US and Germany will meet in Iran for the first time in a year to discuss ways to bring about a solution to the month long stand-off over Iran’s nuclear intentions which have been a significant contributor to rising oil prices this year. The sanctions imposed on Iran carry the risk of seeing oil exports from the country drop to levels not seen since the Iran-Iraq war in the mid 1980’s. Furthermore the subsequent higher prices are now not only hurting Iran but also those countries which implemented them. Leaving all the usual rhetoric aside the market will be eagerly looking for signs of a deal which will leave both sides able to claim some kind of victory but at the same time help ease tensions.
Brent crude traded lower while WTI crude held onto its triple digit handle thereby helping the elevated spread between the two benchmarks to contract. The soon to be opened Seaway pipeline from Cushing, the delivery hub for WTI crude, to the Mexican Golf will help alleviate some of the pressure on storage capacity in the area, thereby helping the price of WTI crude to slowly move back towards the international price level represented by that of Brent crude.
Brent crude spent most of the week looking for support between 119 and 120 dollars per barrel and has so far managed to find it. Until we see the Iranian situation improve, short sellers have been more than happy to take profit ahead of 119 as the risk premium is unlikely to be reduced much before signs of a solution begin to emerge.
