Commodities – Energy

Crude Oil Rises as China Manufacturing PMI Surprises

Crude Oil (WTI) – $81.82 // $0.39 // 0.48%

Commentary: Crude oil prices are higher in overnight trade as the commodity gets a boost from strong manufacturing figures from China and a general increase in risk appetite ahead of this week’s much-anticipated Federal Reserve meeting on November 3rd.

While financial market commentators remain obsessed about the Fed meeting, we have explained that the primary reason for the markets’ strength has been an improvement in the economic outlook. Markets are feeling more confident now that global economic growth will remain swift and that the U.S. is experiencing nothing more than a slow patch, not a double dip recession as was once feared. Tonight we got the latest reading on China’s manufacturing sector, which further supports this view of robust global growth. The country’s PMI for October came in at 54.7, better than the 53.8 that was expected and the 53.8 in September.

Looking ahead, obviously the Fed meeting will be closely watched. There will be probably be a lot of volatility around the event, but regardless of the outcome, we would be buyers on any meaningful sell off.

Our buy range is the low to mid-$70’s. And as we’ve stated in the past, while we remain bullish on financial markets generally, we would not be buyers of crude oil at these levels. Not to sound like a broken record, but supplies of the commodity remain ample, which should keep a lid on prices for now.

Technical Outlook: Prices appear to have slipped below support at a rising trend established from mid-September following a rejection at the top of a downward-sloping channel set from October’s swing high ($82.65). From here, the bears will aim to challenge the significant horizontal barrier at $80.62, with a break below that exposing $79.48.

Commodities – Metals

Gold Awaits Fed Decision for Guidance but Silver at new 30-Year Highs

Gold – $1359.65 // $0.25 // 0.02%

Commentary: Gold closed out last week with some significant gains, with the metal getting support from a sinking U.S. Dollar. As we suggested in our Gold – Forex correlations report, NZD/USD is currently the best pair to trade for proxy gold exposure in the forex markets. We saw the pair move aggressively higher over the last two sessions in step with gold.

As we stated in the report: “There are some fundamental underpinnings to the correlation between NZD/USD and gold. We saw market expectations for future interest rate hikes from the New Zealand central bank rise notably after the latest policy decision. Overnight index swaps indicate that the RBNZ may raise rates by 75 basis points over the next twelve months; that’s up from 50 basis points earlier this week. Higher interest rates translate into tighter monetary conditions.”

The new week’s trading action will be all about the Fed meeting and the size and scope of the central bank’s new quantitative easing program. Gold is still below the all-time high set during the middle of this month above $1380, but is also up from recent lows near $1320. This week we will find out whether the recent gold rebound is merely a part of the overall topping process or whether gold is set to resume its longer-term uptrend.

Technical Outlook: Prices are testing horizontal resistance at $1361.25, with candlestick positioning hinting that a bearish Shooting Star pattern may be forming (although confirmation will be needed on the close of the current bar). If this proves true, it may mark the beginnings of left shoulder in a bearish Head and Shoulders top setup, in which case a neckline could be established at $1325.88, with a break thereof indicating a significant top in place. For the time being however, all of this remains highly speculative. Initial support lines up at $1346.63, while a move higher clears the way for another challenge of the record high at $1387.35.

Silver – $24.87 // $0.13 // 0.51%

Commentary: Silver hit new 30-year highs in overnight trade, hitting levels over $25. Though prices remain overbought, investment demand into silver is insatiable. We would not bet against this trend.

The gold/silver ratio continues to plunge and now stands at 54.7, near the lowest levels since August 2008. (The gold/silver ratio measures the relative performance of gold and silver. A higher number indicates gold outperformance, while a lower number indicates silver outperformance).

Technical Outlook: Prices are testing above resistance at $24.92 – the October swing top – and setting a new 30-year high in the process. A daily close above this juncture exposes the 123.6% Fibonacci extension of the 10/14-10/22 decline at $25.41. Alternatively, a reversal lower sees support at $24.43, the 76.4% Fib.

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