Dour FOMC Growth Forecasts Reverse Crude Gains, Energy Traders Turn To Chinese GDP
Through the end of the US session, NYMEX-based crude would settle the day little changed. If we were simply examining the day-to-day close, it would seem that the day was relatively quiet.
North American Commodity Update
Commodities – Energy
Dour FOMC Growth Forecasts Reverse Crude Gains, Energy Traders Turn to Chinese GDP
Crude Oil (LS NYMEX) – $76.84 // -$0.31 // -0.40%
Through the end of the US session, NYMEX-based crude would settle the day little changed. If we were simply examining the day-to-day close, it would seem that the day was relatively quiet. A look to the CBOE’s Crude Oil Volatility gauge would second this assessment as it hovers near its lowest level of implied activity in two months (33.2 percent). However, mute activity does not correspond to the fundamental activity on the day. In fact, an intraday chart offers a picture of high volatility with a dramatic 2.3 percent rally through the opening hours of New York floor trading. After briefly trading above $78/barrel around mid-day (the highest level for the market in two weeks), bullish convictions would fall apart; and the commodity would reverse course. It is worth nothing that most of the day’s selling pressure (resulting in a $0.60 drop) would occur over the span of 10 minutes. Given the timing of the move, it was clear that a particular catalyst was responsible for the drive.
Through the morning hours of the US trading session, the brief rally to new highs was spurred by a mild advance in sentiment and a bullish surprise from the Department of Energy’s (DoE) weekly inventory figures. Feeding risk appetite initially was the follow through on the previous day’s strong upswing and the news that another round of European government debt auctions met some level of success. A mild sense of hesitation would start to sway speculative buying, however, after the US government reported retail sales through June had dropped 0.5 percent. That being said, the surprise 5.1 million barrel drop in crude oil inventories was impressive enough to shift the supply/demand equilibrium behind price. Considering this sharp reduction followed a similar sized withdrawal the week price, this reading was remarkable enough to offset the fact that total holdings of the precious commodity are still near a record high for the season. Heading into the final hours of the active trading day, few energy traders were likely expecting a remarkable reaction to the FOMC minutes from the last rate decision. However, a downgrade on the range for growth expectations in 2010 and 2011 along with a warning for “some risk of deflation” would spur a steep decline as the reality of a cooler outlook for global growth tempers energy consumption forecasts.
Looking ahead to the next 24 hours of trade, the economic activity theme will carry over to another day with the release of an important round of Chinese data. The world’s second largest energy producer is expected to print a slip in second quarter growth alongside June readings for industrial production and retails sales. For market-moving impact, the GDP reading will be the top release. The annual pace of activity is expected to cool from the previous three months 11.9 percent pace to a 10.5 percent clip. What will it mean for the other major economic players (the UK will release data next week and the US the week after) if the leader of the global recovery starts to pull off its pace? For futures traders, it should also be noted that the August 2010 Brent Oil crude contract expires tomorrow; and the market will roll out to the next liquid contract.The NYMEX rollover will occur on Friday.
Commodities – Metals
A Spike in Volatility Doesn’t Leave a Lasting Impression on Gold Price Action
Spot Gold – $1,209.65 // -$2.70 // -0.20%
With risk appetite easing off its pace; the traditional capital asset classes were struggling for direction. For gold, the traditional drivers do not apply. However, the preferred safe haven for portfolio managers and those looking to avoid currency volatility would still end the day much like its speculative counterparts. This is somewhat unusual considering there was another wave of uncertainty coming out of the European financial system – the primary source of fear for the markets at large. A silver lining in a round of government debt auctions seemed to overwhelm concern related to the trouble that Spain is facing. Testing the market, Portugal would sell 877 million euros worth of debt at a much higher rate; Italy would 6.76 billion euros on instruments tuned to meet the best supply/yield combination; and Germany easily covered its 4.3 billion euro sale. It seems that both core and periphery EU economies are able to tap the capital market for funds (but the cost is certainly rising up). Not drawing enough respect though is the fact that the Bank of Spain reported the nation’s banks tapped the ECB for 126 billion euro sin loans through the month of June. This is one-quarter of the total asked by the region and is a clear sign that this particular economy is facing serious trouble. Nonetheless, the reaction to this news would prove tepid.
Yet, despite the lack of reaction to the financial uncertainty for the day; the precious metal was not without its remarkable moments. Around mid-day during the US trading hours, gold rallied 0.8 percent in a matter of minutes and would shortly after tumble 1.3 percent to completely reverse the swing. Where did this strength come from? It is highly probable that this remarkable move was simply a speculative or operational move in the market. According to the CBOE’s volatility index for gold, expectations for activity are at the lowest level since April 23rd; and aggregate volume on US futures is holding at depressed levels. A large order on either side of the market can have a greater impact on price action under these conditions.
What is further interesting is the lack of response to the FOMC’s minutes. Though the policy group did not change the benchmark lending rate, they did lower their expectations for growth and inflation. A lack of growth is a predecessor to a drop in investment for traditional asset classes; while a lack of price pressures diminishes the need for an inflation hedge (another of the metal’s roles). We will see whether the Chinese 2Q GDP figures can add to the fundamental picture.
Spot Silver – $18.35 // $0.11 // 0.58%
Silver was following the tempered pace of risk appetite through the early hours of Wednesday’s trading session; but the metal would not move in lockstep with equities or gold as the day progressed. Instead, the commodity would follow the path that the industrial metals would set out. If this relationship holds, China’s GDP release could invite a significant boost in volatility in the hours ahead.
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Written by John Kicklighter, Strategist
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