Most risk-sensitive securities were on the advance Tuesday; and the speculative favorite crude futures contract was no exception. In fact, the front-month contract on the NYMEX forged its largest single-day advance in four months in a nearly four percent move. However, trends are not made in a single day.
North American Commodity Update
Commodities – Energy
A Surge in Risk Appetite Carries Crude to an Aggressive Rally
Crude Oil (LS NYMEX) – $77.07 // $2.94 // 3.97%
Most risk-sensitive securities were on the advance Tuesday; and the speculative favorite crude futures contract was no exception. In fact, the front-month contract on the NYMEX forged its largest single-day advance in four months in a nearly four percent move. However, trends are not made in a single day. While the day’s advance was substantial, oil still has significant climb ahead of it to retrace the losses of the past month. What’s more, looking at the motivation behind the rally in price action, volume was notably lighter in the sessions advance than with a number of declines in the recent past; and activity has generally cooled over the past week. So, what was this source of this sudden shock? The answer is clear: risk appetite. A sudden jump in investor optimism has revived the correlations between markets and led those securities with a clear link to yield demand higher. While a measured bullish bias has developed over the past week, momentum has been notably absent as perceived fundamental strength has deteriorated with the emergence of staid recovery data and emerging financial troubles around the world. Greece in particular is a top headline concern; but concern may be temporarily lifted thanks after the EU left the market in wait for a solution to a possible default and given the extended holiday weekend for US markets. The market will look for either a meaningful solution to Greece’s pressure on the broader Euro Zone or uncertainty will very likely resuscitate fear.
Turning from the speculative influences on oil to supply-and-demand fundamentals, there has been a notable improvement in the quality of data over the past 48 hours. In particular, the Japanese 4Q GDP numbers released in the very early morning hours of Monday’s Asian session bode well for energy demand. The preliminary reading of growth reported 1.1 percent expansion through the final three months of last year – the largest increase since the first quarter of 2008. In similar fashion, the annualized reading advanced to a 4.6 percent clip. As the third largest energy consumer in the world, this data has significant tout when it comes to balancing the gap between crude output and consumption. However, like most other industrialized nations, the strong headline readings for Japan are backed by data that points to a questionable trend. Domestic spending and onset deflation are difficult weights to overcome going forward. Another notable boost in the US session was the pickup in the Empire Manufacturing report for February. A four-month high from this indicator is notable; but tomorrow’s industrial productive figures will likely carry more weight.
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Commodities – Metals
Gold Surges as the Safe-Haven US Dollar Tumbles
Spot Gold – $1,119.65 // $18.55 // 1.68%
With risk appetite on the rise and the US dollar tumbling Tuesday, gold would find traction in its speculative appeal. On the back of the most aggressive rally in three months, the precious metal was easily able to break the momentum in the loose descending trend channel of the past two-and-a-half months. Similar remarkable reversals were made with the US dollar and Dow Jones Industrial Index (each holding a notable correlation to the extremes of sentiment). However, judging the reversal of underlying sentiment on the foundation of technical alone would be faulty. The absence of US and Chinese liquidity Monday would build pressure behind a tentative retracement of a broader bear trend this past week. However concerns with Greece’s deficit – and the European Union’s handling of the situation – develop over the rest of the week, investor sentiment will follow. The threat of a default may abate as general optimism returns; but the probability that Greece will trim its budget to meet the group’s limits anytime in the near future is extraordinarily low. This is a balance between short-term and long-term fundamental concerns. As has been the case since markets have existed, greed can fill in for fundamental shortfalls and fear pick apart silver linings. Gauging speculators’ bias for risk is essential for charting the course for gold. In the meantime, an eye should be kept on upcoming inflation data. This morning, the United Kingdom’s consumer-based price readings jumped to a 3.5 percent clip – though BoE governor King suggested this was a temporary surge. US inflation indicators scheduled over the next three days will act to confirm whether this the trend for the global economy. If price pressures actually accelerate, it could add additional fuel to a bullish trend for this inflation-hedge.
Spot Silver – $16.14 // $0.59 // 3.82%
With a marked jump in risk appetite and the biggest drop from the US dollar in nearly three months, silver was shooting higher Tuesday. Without the burden of such fundamental roles as inflation-hedge or safe-haven (like gold), this metal would show a purified response to the drive in risk appetite. Looking at price action, the commodity saw its biggest single-day rally since November 16th and easily cleared the even $16/ounce level. Maintaining this course will not be nearly as difficult as maintaining momentum. Monitoring the activity of the dollar and Dow will give a meaningful read on the actions of this commodity.
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Written by John Kicklighter, Strategist
Questions or Comments about this article? Send them to jkicklighter@dailyfx.com
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