The Pound Too Weak, The Euro Too Strong And The Greenback Rising

The Pound To Weak, The Euro To Strong And The Greenback Rising
The Pound To Weak, The Euro To Strong And The Greenback Rising

Lesser but important events were overshadowed by the Federal Reserve meeting this week. The euro which has climbed to recent highs touching the unthinkable 1.38 level has retreated to 1.3709 as the US dollar recovers, although it was supported by some data that met with a bit of happiness in the eurozone. Spain emerged from its two year recession but the strong euro can turn good to bed quickly as the Spanish economy tries to reinvent itself. Record exports are the main reason Spain on Wednesday was able to report 0.1% growth of its gross national product in the three months through September after nine straight quarters of contraction. While that is hardly enough to make much of a dent in the country’s staggering unemployment rate anytime soon, the trend is going in the right direction. Spain’s growing international sales, with exports of goods up by nearly 7% this year, are all the more impressive because even powerhouse Germany has seen recent weakness in sales abroad. The latest figure also beats the average growth during the boom years, before the global financial crisis hit. Export growth could be jeopardized, however, by the roughly 8% rise in the value of the euro against the dollar since July, as it is making products sold outside the euro zone more costly. The increase in exports has also seen a small drop in the huge Spanish unemployment rate, which now stands at 26%

The euro’s rise is “worrisome because it goes in the opposite direction of Spain’s entire export-led recovery strategy,” said Robert Tornabell, an economist at Spain’s Esade Business School. He said he was already aware of a Spanish factory that has told workers it will have to cut their wages, in part, to compensate for the stronger euro according to WSJ.

The US dollar added 11 points this morning and continues to climb towards the 80 price level which still remains low for the greenback which usually trades in the 81-82 range.  The Great British pound is trading at 1.6020 down by 21 points as it continues a steady decline again the greenback. The pair as recently as last week was threatening to trade above the 1.63 price level when a bit of weak economic data turned investors away. A generally disappointing few days of UK data releases saw the Pound drift lower against almost all of the other sixteen most actively traded global currencies. An early reading of October’s UK Retail Sales from the CBI revealed that British shop sales have flatlined this month, adding to the recent impression that the tentative domestic economic recovery is running out of steam.  This impression was added to by the latest Land Registry figures which suggested that the average UK property price increased by a year-on-year 3.4% over the past twelve months. This is only marginally above the annualized increase in general consumer prices, putting paid to the notion that a housing sector bubble is underway in Britain.

Global Stock Exchanges Pay Little Attention To FOMC Statement

Global Stock Exchanges Pay Little Attention To FOMC Statement
Global Stock Exchanges Pay Little Attention To FOMC Statement
Stock exchanges around the globe had little response to the FOMC decision and statement, or better put moved on after being assured that Mr Bernanke and associates did not do anything unexpected. They did exactly as expected. They held rates and policy and kept their financial assessment pretty much the same but toned it down a bit assuring markets that the US economy had passed the through the recent political storm with little damage. Reserve officials ended their policy meeting with their signature easy-money program intact and no clear signal about whether they would begin pulling it back at their December meeting or continue it into 2014 during a leadership transition at the central bank.

In the six weeks since the Fed last meeting in September, the US has been rocked by fiscal brinkmanship that led to a government shutdown that delayed crucial economic data and raised worries that the Treasury Department could miss some bond payments. Fed officials stuck to their assessment of the slow-growing economy following that political storm and decided to keep their $85 billion-a-month bond-buying program in place for now. The decision left investors uncertain about when officials will begin paring the purchases that have been an important driver of asset prices and interest rates.

Inflation is well below the Fed’s 2% target. The Cleveland Fed tracks inflation expectations, and they have also been consistently weak for some time. For some Fed officials, low inflation argues for more aggressive central bank action, given that the Fed is supposed to prevent inflation from ranging too far below or above its 2% target. On the bubble issue, some other Fed officials worry about that possibility but most of them don’t currently see a level of excess that threatens broader financial stability. Some have said the rise in rates seen since the late spring helped to flush out whatever froth and complacency that might have been building earlier this year.

The Fed statement came after European markets had closed for the day. The Stoxx 600 closed little changed at 320.80, having hit a five-year high of 322.90 earlier in the session. Germany’s DAX shed 0.1%, while London’s FTSE 100 was broadly flat. US markets had a bit of reaction but not drastically after trading on a positive note most of the week. The Dow Jones backed away from a fresh record set in the previous session. The index closed down 61.59 points at 15,618.76 points. The Dow was up as much as 41 points before the Fed released its statement.  Stocks have rallied this year, with the 24 per cent gain in the S&P 500 fuelled, in part, by the Fed’s easy-money policies.  The S&P 500 index gave up 8.64 points, or 0.49 per cent, to close at 1,763.31 points. In the previous session, the S&P 500 rose 0.6 per cent to a third-straight record high and seventh record in nine sessions. The Nasdaq fell 21.72 points, or 0.55 per cent, to 3,930.62 points. 

This morning Asian markets are trading in the red. The Bank of Japan closed their meeting with no changes to rates or policy. With no positive catalysts from the Fed overnight, most regional markets dropped Thursday. The Nikkei fell 0.4%, as the yen strengthened a touch in Asia recently at ¥98.38 to the dollar. Australia’s markets climbed by 0.3%, and South Korea’s Kospi gave up 0.7%. In China, Hong Kong’s Hang Seng dipped 0.6%, and the Shanghai Composite fell 0.8%. The global earnings season progressed, with markets reacting to results in Australia, Japan and China and of course the US where Facebook was a major winner yesterday.

 

 

 

U.S. Dollar Reverses Course after Sluggish Economic Reports

Forex and commodity markets are holding steady ahead of this afternoon’s release of the latest Federal Reserve Open Market Committee statement at 2pm ET. The central bank is expected to maintain its monthly $85 billion in monetary stimulus. Investors want to know, however, whether the central bank will leave out there the possibility of a December taper or push it into March or April 2014.

The action this week in the U.S. Dollar Index suggests that either decision by the Fed could trigger a rally since one will be a surprise and the other has already been baked into the recent bearish price action. If the news produces another short-covering surge in the dollar then the pressure will be on the Forex and commodity markets.

USD 5

This morning’s news of weaker-than-expected ADP jobs data and the smallest increase in consumer inflation since April helped reverse a U.S. Dollar which had posted an earlier gain. These reports increased the chances the Fed would bypass a December taper and move it into 2014. The drop in the dollar also led to intraday reversals in the Euro, British Pound, and gold, but failed to underpin crude oil.

The EUR/USD weakened early in the session after follow-through selling pressure dropped the Forex pair to a one-week low at 1.3732. The move was a reaction to this morning’s weak U.S. economic data and could be a sign that Euro investors are looking for a bullish announcement from the Fed. The big question is whether the upside momentum will be strong enough to take out the major Fibonacci level at 1.3833. Euro investors are questioning whether the Euro Zone economy is strong enough to support a 1.3800 or higher currency.

The bearish U.S. economic news also put a halt to the prolonged decline in the GBP/USD. This market could produce the most volatility since investors have two situations to deal with. Firstly, traders seem to be in liquidation mode on the thought that the U.K. economy may not be strong enough to support the market at current price levels. Secondly, a bearish Fed announcement should drive the dollar lower while driving up the British Pound.

The conflicting news stories suggests the strong possibility of a failed rally. In other words, shorts are likely to take the market higher after the Fed news, but the rally is likely to be limited.

The reversal in the U.S. Dollar helped trigger an intraday short-covering rally in December Gold. A weaker dollar after the Fed announcement should drive gold prices through the recent top at $1361.80 and the Fibonacci level at $1364.09. A bearish report should drive gold prices lower and set up a potential near-term correction into $1306.40. The first sign of weakness will be a close under $1342.50. A break in the equity markets could actually underpin gold if it leads to protective hedge buying.

December crude oil finished lower. Despite the reversal down in the dollar, crude oil investors focused on this morning’s weak U.S. economic data. The action suggests that investors are still concerned that a sluggish U.S. economy will lead to a drop in crude oil demand and increase the supply glut. This downtrend is likely to continue over the near-term unless today’s supply and demand report shows a drop in supply or better-than-expected demand. 

Daily commentary – European and US stock markets

Daily commentary – European and US stock markets
Daily commentary – European and US stock markets
European markets

European stocks opened higher this morning, supported by better-than-expected quarterly results of several companies. The UK’s FTSE100 was up 0.64% to 6,818.83, France’s CAC40 rose 0.74% to 4,309.28, while Germany’s DAX30 climbed 0.50% to 9,050.59 at the time of writing. Several companies’ quarterly reports beat analysts’ expectations and in turn their share prices increased, starting with Europe’s largest carmaker Volkswagen, whose shares rose by 4% to €181.80. UK clothing retailer Next Plc. was also rising strongly by about 5% at the time of writing, to 5,460.91p. One of the top CAC40 gainers was French electricity provider Electricite de France SA (EDF), whose shares were climbing by 0.98% €26.2050 at the time of writing.

 dax30

US markets

Major US indices advanced in the latest session, despite a bit disappointing macroeconomic data. The S&P500 managed to reach a new record, strengthening its good performance in recent days. As the highly-anticipated Fed meeting started yesterday, investors turned their attention on its outcome which is due to be announced today.

Meanwhile, some important economic results were announced, which revealed that the Retail Sales for September fell to -0.1%, opposite experts’ expectations for a 0.1% rise. Another report showed the Producer Price Index dropping to -0.1% and 0.3%, MoM and YoY, respectively. US Consumer Confidence for October also registered a drop, falling sharply from 80.2 the previous month to 71.2 points.

 

The S&P500 gained 0.6%, or 9.84 points, to end at 1,771.95, marking its 33rd record closing this year. The best performing industry within the benchmark was the telecommunications sector while the utility sector was the worst performer.

The Nasdaq100 rose by 0.3%, or 12.21 points, to close at 3,952.34, with trading being halted for about an hour because of an error.

 nasdaq100

The Dow rose by 0.7%, advancing by 111.42 points to a fresh historical peak at 15,680.35, with 24 of the 30 companies within the benchmark recording increases. One of the highest earners was IBM Corp, whose shares climbed by 2.7%. Pfizer Inc. shares also registered a rise, adding 1.7% to reach $31.26 per share as the pharmaceutical company reported better quarterly earnings, compared to analysts’ expectations.

On the losing side of the charts was Caterpillar Inc. whose shares declined by 0.3%.

Looking further in the day, the Fed is due to announce its interest rate decision along with its outlook on tapering the asset-buying programme. Other news include the Reserve Bank of New Zealand interest rate decision and Japan’s JMMA Manufacturing Purchasing Manager Index (Oct).

 

Source: dfmarkets.co.uk

 

Disclaimer: The Content of these charts and analyses does not constitute any form of advice or recommendation by Delta Financial Markets to buy, sell (or refraining from making) any trade or investment. You may wish to seek independent advice before entering into transactions.

Delta Financial Markets shall not be held liable by you or any others for any decision made or action taken by you or others based upon reliance on or use of information or materials obtained or accessed through use of these technical analyses and charts. DF Markets assumes no responsibility for errors, inaccuracies or omissions in these materials, nor shall it be liable for damages arising out of any person’s reliance upon the information on this page. DF Markets shall not be liable for any special, indirect, incidental, or consequential damages.

 

Central Banks Around The Globe Meeting This Week Keep Currency Traders Jumping

Central Banks Around The Globe Meeting This Week Keep Currency Traders Jumping
Central Banks Around The Globe Meeting This Week Keep Currency Traders Jumping
Once again central banks for the focus of the global forex traders. The US Federal Reserve Open Market Committee will end its two day meeting later in the US session with a statement from Mr. Bernanke. The committee is expected to keep interest rates and asset purchases at current levels, but the big market excitement will be the assessment of the economy which might give some indication as to when the Federal Reserve will begin to reduce their balance sheet as asset purchases cannot go on forever. It is now predicted that it will take the Fed until 2019 to unwind all of the current purchases.

With markets now expecting the Fed will delay unwinding its bond-buying stimulus until next year, the euro has strengthened to its highest level since November 2011 and is up nearly 7 percent over the last three months at around $1.38, though that is way below the peaks above $1.60 it hit in 2008. A rise in the euro to a two-year high is complicating the European Central Bank’s policy puzzle, and Governing Council members are at odds over how to respond. The appreciation is largely about dollar weakness due to U.S. Federal Reserve policy, but the outcome for ECB policymakers is concern that already subdued inflation will slow further and a nascent economic recovery will falter. At only 1.1 percent, inflation is running well below the ECB’s target of just under 2 percent and the currency’s rise could depress price pressures even more, making it a live issue for the eurozone’s central bankers. Although Mr. Draghi and associates have done a great deal talking they have taken very little action. Traders are hoping for more LTRO actions in the near term. The ECB’s main interest rate is already at a record low 0.5 percent after a cut in May. Then, some policymakers wanted a bigger reduction, but in the end the Governing Council agreed to cut rates by 25 basis points. The euro’s buoyancy is not only against the dollar – on a trade-weighted basis it is also at its highest level in almost two years. This is starting to affect business. Exports suffer as the euro climbs.  The dollar climbed for a third straight session against a basket of the world’s most actively traded currencies on Tuesday as investors, convinced the Federal Reserve will keep U.S. monetary policy ultra-loose well into next year, trimmed bearish bets. The dollar index, which tracks the greenback against six currencies but is dominated by the euro, last traded 0.1 percent higher at 79.308 as Fed policymakers started a two-day meeting. The index was below the session’s earlier one-week peak of 79.535 but above Friday’s 78.998, which marked its lowest since February.

Across the continent in Japan, traders are waiting for the upcoming two day Bank of Japan meeting. Retail sales climbed on Tuesday and industrial production printed above previous releases. Against the yen, the dollar last traded at 97.94 yen, up 0.3 percent on the day. The Australian dollar retreated after Reserve Bank of Australia Governor Glenn Stevens tried to talk it down. It last traded 0.8 percent lower at $0.9494, down from last Wednesday’s $0.9758, a four-month high, according to Reuter’s data. Tomorrow traders will see the decision from the Reserve Bank of New Zealand. New Zealand’s Reserve Bank governor Graeme Wheeler is expected to keep the official cash rate at a record-low 2.5 percent when he reviews monetary policy tomorrow, though economists are looking for a softening on the future track of hikes given the persistent strength in the local currency. Wheeler has been steered clear of lifting interest rates in response to a booming property market and increasing building activity for fear of fuelling more gains in the kiwi dollar. The kiwi is trading at 0.8255.

 

 

 

Oil Inventories Continue To Climb As Prices Drop

Oil Inventories Continue To Climb As Prices Drop
Oil Inventories Continue To Climb As Prices Drop
The US Energy Department (EIA) is scheduled to release its weekly inventories report early in the North American session and US crude oil inventories are expected to rise by 2.2 million barrels for the week ending on 25th October 2013. Gasoline stocks are expected to drop by 0.1 million barrels whereas distillate inventories are expected to plunge by 0.3 million barrels for the same period. Crude oil continued to ease this morning giving up 49 cents to trade at 97.71 as weak US data is reducing demand for oil consumption and increased production continue to push up stocks. Yesterday the American Petroleum Institute (API) report showed that US crude oil inventories increased more than expected by 5.9 million barrels to 381.30 million barrels for the week ending on 25th October 2013. Gasoline inventories rose by 740,000 million barrels to 222.10 million barrels and whereas distillate inventories fell by 2.7 million barrels to 122.50 million barrels for the same week. Crude oil inventories will be released in the early morning but markets will remain focused on the Federal Reserve statement and their assessment of the US economy. A dovish statement could weigh heavily on the demand and price of crude oil. Brent oil is trading at 108.78 slightly in the red but is being well supported by a jump in industrial production in Japan. The impact of the ongoing FOMC meeting in the US is visible in the global market. This morning Asian markets are robustly up while the Forex US dollar has appreciated against most of its rivals. The euro has shred its previous gain and at present trading at $1.3740. Likewise, the U.K. currency, the Japanese yen and many others are also in the negative territory. News released yesterday from the US indicated that the country’s lawmakers are considering new sanctions against Iran which could slash the OPEC oil member’s exports by 50% over the next year. Analysts primarily attributed the rally in Brent crude futures to reports of plunging Libyan production stemming from political instability and labor strikes at that country’s oil export terminals. The latest concerns stemmed from a labor protest at El Sharara field although observers expect that protest to end soon.

Two of the most volatile oil producers—Libya and Iraq—experienced serious unrest over the weekend. In Iraq, multiple bombing attacks targeted commercial areas, killing dozens of people, authorities said. Meanwhile, Goldman Sachs maintained its near-term Brent price forecast of $110, saying any additional disruptions in Libya could drive prices higher. Exports from Libya have been hit drastically due to protests by workers at the ports. However, Libya’s Prime Minister expects one of the ports with capacity of 1, 10,000 bpd to reopen next week, easing supply concerns from the OPEC region. Crude oil prices are expected to go down as expectations of higher inventories and easing supply worries from Libya can hurt prices.

Natural gas futures ended lower on Tuesday 3.65 but eased again this morning to 3.63 on mild weather forecasts for the week. Prices are expected to move down further today. Front-month gas futures on the New York Mercantile Exchange ended down 0.87 percent per million British thermal units. Natural gas remains in the headlines with new projects and increase demand for exports as it is steadily cutting into coal usage, but increased demand remains years ahead as the DOE withheld approval on projects for a long time, and has just recently approved the projects to begin terminals and export functions. Natural gas is quickly becoming the number favored energy product.

 

Base Metals, Industrial Metals and Precious Metals In The Green

Base Metals, Industrial Metals and Precious Metals In The Green
Base Metals, Industrial Metals and Precious Metals In The Green
As the month draws to an end, there is a serious lack of data on the calendar leaving traders trying to determine just how well the eurozone is recovering. Today, Spanish data is expected to show that Spain slipped out of recession. Later this morning the official statistics will be released which are estimated to show that GDP grew by .01%. Other than this the eurozone will see German employment numbers. US data will not hit the markets until late today which will culminate with the US FOMC statement. US data today includes leading indicator ADP’s non-farm payroll data along with CPI. Gold is trading flat at 1344.00 moving between small gains and losses as the US dollar gains as traders expect the FOMC to hold course.

Gold recovered this month on hopes that the Fed won’t slow asset purchases until next year after a government shutdown hurt the economy. Policy makers last month unexpectedly refrained from reducing stimulus. BlackRock Inc. Chief Executive Officer Laurence D. Fink said yesterday it’s imperative that tapering begins as the policy is contributing to “bubble-like markets.” Gold declined 20 percent in 2013, heading for the first annual loss since 2000. The U.S. central bank will pare the $85 billion in monthly bond buying at its March meeting, according to a Bloomberg survey of analysts on Oct. 17-18.

Holdings in the SPDR Gold Trust, the biggest bullion-backed exchange-traded product, were unchanged at 872.02 metric tons. Bloomberg’s U.S. Dollar Index, a measure against 10 currencies, was little changed today after climbing 0.4 percent on Tuesday. Silver continues to diverge from gold adding 25 points this morning to trade at 22.517 supported by a demand for industrial metals, which helped push copper up 12 pips to 3.292 moving slowly back to its consistent price of 3.30. LME Copper traded on a positive note by 0.3 percent yesterday as the orders to remove supplies from warehouses jumped the most in four months and LME inventories decline the most since 2009. Also, expectations of delay in QE taper supported an upside in prices of the red metal. A jump this morning in Japanese industrial production is helping the demand for metals. Japan’s industrial output rose 1.5 percent in September from the previous month, as stronger production of vehicles and electronic components added to signs the recovery in the world’s third-largest economy is gaining.

During the early morning session, base metals are trading slightly positive in the range of 0.2% to 0.4% at the LME on the back of positive cues from Asian equities which are trading higher. Coming to the commodity-specific updates, speculators maintain a negative view on copper as the global mine production increased by 8% in the first eight months itself on a year on year basis according to ICSG.

 

Forex Trading: Trading Changes in Central Bank Policy

Forex Trading:  Trading Changes in Central Bank Policy

Forex prices are largely determined by the extent to which investors are able to accumulate yield profits from overnight positions.  These potential gains are often called “carry value,” but are determined by central bank policy and the interest rate levels that are seen at any given moment.  Because of this, substantial trading opportunities can be found when central banks change monetary policy.  This can work in both directions, as reductions in interest rates can be used as an argument to sell a currency, while interest rate increases are generally thought of as a reason to start buying that currency.

So, how exactly can we position forex trades in anticipation of these events?  As always, the market’s discussion of expectation versus reality will play a dominant role in the way market prices are trading, and will trade at a later date:  “If, at any time, the market experiences a significant surprise in changing central bank policy,” said Rick Bartlett, currency analyst at CornerTrader, “we can expect volatility to increase and price levels to see major changes.”  So, if markets are expecting no change in interest rates, and then a central bank elects to raise interest rates at their next meeting, the market reaction could likely be explosive. 

Forex Traders and the Act of Re-Positioning

Events like these have the potential to send the value of that currency much higher — an excellent buying opportunity for bullish investors.  Of course, the reverse would be seen after a surprise reduction in lending rates.  Once we understand these factors, positioning forex trades after interest rate decisions becomes a much more predictable process.  This is because there has been reduced buying activity before the event, so investors have not had an opportunity to act on the information previously.  In these cases, we would expect the value of the currency to skyrocket on that day, and probably even longer.  The same is also true when surprises are seen on the downside.  If markets were not expecting a change in interest rates, the value of the currency would show major declines if the central bank decided to surprise markets by making a rate reduction.

The key interplay to watch, at all times, is the market’s expectation versus the reality that is seen later (at the result of the critical interest rate meeting).  If you are looking to trade in the forex markets with a “fundamental” or news-based strategy, then this is the first element that you must understand before you commit to any trading decisions.  The data itself is not all that can be watched, as these reports are merely a precursor for what is likely to happen next in the central bank of that country.   Traders must have some sense of what the market was expecting in these cases so that it is easier to forecast how traders will be changing their already established positions. 

 

                

GBP/USD Weakens as Speculators Question Economy’s Strength

The U.S. Dollar finished higher against the Euro and British Pound on Tuesday. Gold and crude oil also weakened because the higher dollar hurt demand for commodities. A slew of U.S. economic reports also contributed to the strength in the dollar, but since the main trend is down and the fundamentals overwhelming bearish, the rally in the Greenback is likely to be capped by renewed selling pressure. This could trigger a recovery in the currencies and commodities later in the session.

Besides the oversold conditions plaguing the dollar, investors may have also priced in today’s economic reports. Today, it was reported that U.S. retail sales fell slightly to a seasonally adjusted 0.1%. The PPI also dipped in September to a seasonally adjusted 0.1%. Keep in mind that these reports did not include data from October during the government shutdown and debt-ceiling debate. Consumer confidence as reported by the Conference Board also declined.

UK

The GBP/USD fell sharply on Tuesday amid speculation the U.K. economic data due this week won’t be strong enough to sustain the current rally. Selling pressure has been showing up on the daily chart since the last rally to 1.6250 failed to take out the previous top at 1.6252. The minor trend turned down this morning when the Sterling traded through 1.6108, but this is not likely to trigger an acceleration to the downside. So far it’s a normal correction, but conditions could change if 1.5886 fails to hold as support.

Since the Bank of England has been warning that the market was “too hot” given the current economic conditions, the break should not have come as a surprise. Investors may decide to take the Sterling back down to more reasonable levels until the next BoE meeting on November 6. At this time, the central bank may offer fresh guidance that could either stabilize the market or trigger another leg down.

There were no major European economic releases today which means investors were left to react to the U.S. dollar. Technical factors also contributed to the EUR/USD weakness. Last week’s rally to 1.3831 and failure at just under the major Fibonacci level at 1.3833 is probably exerting the most pressure on the Forex pair.  In addition, investors are questioning whether the stronger Euro or the weaker dollar has been the main driving force behind the rally in the EUR/USD. Either way, the market is overbought, leading to the possibility of a near-term correction into 1.3652 to 1.3609.

December gold also weakened today. Technical factors and the stronger dollar are contributing to the weakness. Technically, the market is finding resistance inside the major retracement zone bounded by $1342.50 to $1364.09. Fundamentally, investors tend to shed gold when the dollar rallies. This is because gold is dollar-denominated, and a rising dollar makes it more expensive to foreign traders. Leading to a drop in demand.

Gold could continue to drop if stocks keep rallying and if shorts continue to cover their positions in the dollar. A sharp break in the equity markets, however, could lead to a hedge-induced rally.

Finally, December crude oil traded weaker after a two-day short-covering rally alleviated some of the selling pressure that drove the market down to $95.95 late last week. This morning, the market is straddling a former Fibonacci support level at $98.17.

Fundamentally, the sluggish U.S. economy continues to create demand worries. Although traders expect the Fed to continue with its stimulus plans, this has not been helpful for crude prices despite the weaker dollar. This means that crude traders are more concerned about supply/demand issues rather than the state of the economy. Unless demand suddenly picks up, crude oil traders are probably not going to be able to sustain any rallies. 

“Boring” Defensive Plays Where the Action Is in This Kind of Economy

“Boring” Defensive Plays Where the Action Is in This Kind of Economy
“Boring” Defensive Plays Where the Action Is in This Kind of Economy
While the stock market appears to want to move higher, we may be seeing a shift from high momentum growth stocks like Google Inc. (NASDAQ/GOOG) and priceline.com Incorporated (NASDAQ/PCLN)—which are both trading above $1,000 a share—to the more “boring” names.

The gains made by the momentum stocks have been spectacular so far, to the point where we are seeing overextension on the charts, which are warning of a possible correction.

Cyclical stocks, or those companies that swing with the U.S. economy, appear to be backing off. These include goods and services that are non-essential to the consumer. Spending on these discretionary goods and services tends to fall when the U.S. economy stalls and surges when consumers are spending during the good times, when jobs are plentiful.

Should the U.S. economy falter, you should look at reducing your stock market exposure to cyclical stocks, such as those in the automotive, furniture, retail, travel, and restaurant sectors. When times aren’t so good, consumers will look to cut spending in these areas first to save money.

While the cyclical stocks are continuing to fare pretty well, as shown by the chart of the Morgan Stanley Cyclicals Index below, I believe the stocks will be laggards if the U.S. economy continues to stall.

Cyclicals Index Chart

 Chart courtesy of www.StockCharts.com

What you should look at is the defensive sector. I know these may seem like boring stocks, but should the U.S. economy stall, I would look at these companies to outperform the broader stock market.

Defensive stocks are those companies that deliver steady earnings and dividends regardless of how the U.S. economy is doing. In bad times or when an economy is stalling, as may be the case, defensive stocks will fare better. Of course, this group will underperform when the U.S. economy is growing, which is when you should revert back to cyclical stocks.

Take a look at the chart of the S&P Consumer Staples Select Sector below. There’s currently some hesitation on the chart, but we could see a breakout if the U.S. economy begins to stall.

This article “Boring” Defensive Plays Where the Action Is in This Kind of Economy originally published at Investment Contrarians by George Leong

Two Precious Metals with a Compelling Supply-Demand Dynamic

Two Precious Metals with a Compelling Supply-Demand Dynamic
Two Precious Metals with a Compelling Supply-Demand Dynamic
As readers of Investment Contrarians are probably well aware, precious metals have been hit hard this year. Along with the drop in the price of precious metals, mining stocks have also significantly declined in price.

However, I think we might be entering a period of increased demand that should see higher prices for the precious metals sector and the associated mining stocks.

Longtime readers won’t be surprised when I mention two precious metals that are developing increased demand from industrial use: platinum and palladium.

In past articles, I have written extensively on both of these white precious metals and that there will be significant imbalances in the market—not the financial (paper) market, but actual physical demand for these precious metals.

As the majority of demand for both of these precious metals comes from industrial use, specifically in the construction of catalytic converters for the automotive industry, it’s quite easy to see where demand and supply will be moving forward.

Mining stocks involved in both of these precious metals are having difficulty increasing supply. The two nations that supply most of these two precious metals are Russia and South Africa. Mining stocks have had a significant amount of trouble over the past year especially in South Africa, with labor issues causing disruptions in production and higher costs.

Demand comes from vehicle sales, and with the cheap money being pumped worldwide, this means affordable financing for millions of people. As you probably know, car sales in America are booming once again. But a huge market over the next decade will be China.

When you consider there are still hundreds of millions of people who don’t have a car but will, over the next decade, likely begin buying vehicles, there is a huge potential opportunity here. And it’s a strong driver of demand for both platinum and palladium.

While most precious metals have suffered this year, palladium is actually positive year-to-date and close to its highs. This just shows how strong industrial demand is and how low supply is coming from the mining stocks.

However, this is one difficult situation with both of these precious metals, since many of the mining stocks involved in producing both platinum and palladium are located in South Africa. Because of the potential for labor strikes, costs are beginning to rise and supply is not guaranteed.

While supply disruptions might be positive for the price of the actual commodity, mining stocks themselves could face pressure in earnings if a violent strike were to erupt in South Africa. Last year, there were labor clashes and even deaths involved, with the related mining stocks ultimately raising salaries.

In my opinion, both of these precious metals will be priced much higher over the next decade, simply from the increased demand and lack of new supply. However, one needs to be careful to avoid mining stocks in that region, as they could be extremely volatile.

There are two ways to consider investing in these precious metals. One is through a company called Stillwater Mining Company (NYSE/SWC), which is an American-based firm that not only produces platinum and palladium from mining operations, but also has recycling facilities for spent catalytic converters. The company is the largest producer of platinum and palladium outside Russia and South Africa.

Another option for playing mining stocks in this area is The Sprott Physical Platinum and Palladium Trust (NYSEArca/SPPP), a closed-end fund that holds both metals physically.

Let’s face it: both of these precious metals are difficult to find and are located in only a few places around the world. We simply can’t print more platinum and palladium. However, industrial demand will continue to rise, especially as hundreds of millions of people start driving cars. The supply-demand dynamic over the next decade is quite compelling, in my opinion, for mining stocks in both of these precious metals.

This article Two Precious Metals with a Compelling Supply-Demand Dynamic originally published at Investment Contrarians by Sasha Cekerevac

Is Sitting on the Fence the Best Investment Strategy Right Now?

Is Sitting on the Fence the Best Investment Strategy Right Now?
Is Sitting on the Fence the Best Investment Strategy Right Now?
Recently, a friend called me up and asked for some investment advice. He wondered if he should run for the exits, given the recent run-up in the stock market in what is now a somewhat euphoric investment climate.

My response? Yes and no.

I told my friend to take some profits off the table, but at the same time, he should also ride the stock market higher to what will likely be higher upside moves.

This is something that I have constantly advised during this recent stock market rally.

Hey, why take all of the your profits off the table now when there will surely (at least I’m thinking) be more gains to end the year? That is, of course, if the shopping season doesn’t tank and Federal Reserve Chairman Ben Bernanke doesn’t decide to surprise us with tapering. I doubt Ben will be smart enough to taper, but then again, with his stint as the head of the central bank drawing to a close, he may yet give us a surprise.

At this time, it’s all about maximizing your opportunities in the stock market while the easy money is flowing in. In other words, follow Dow theory and ride the ticker tape higher.

Even long-time perennial bear David Rosenberg of Gluskin Sheff appears to be conforming to the mass populous. In an interview with CNBC, Rosenberg seemed the most bullish I have ever seen him towards the stock market over the past decade, when he was constantly telling us stocks were set to fall.

In the interview, Rosenberg went as far as to suggest a stock weighting of just over 50%. (Source: Navarro, B.J., “Why a top market bear is turning bullish,” CNBC, October 22, 2013.) His top areas for growth include industrials, technology, and large-cap exporters.

“There are some opportunities in the stock market,” Rosenberg commented. (Source: Ibid.)

So here we are, chasing the S&P 500 higher breaking record after record.

However, we will likely see a retrenchment should the rapid rise continue unabated, as an overextension of the market is problematic.

So I’d offer investors the same advice I offered to my friend: for now, ride the gains, but be sure to take some profits off the table, especially following surges in a stock that appear to be overdone. The case of Netflix, Inc. (NASDAQ/NFLX) last Tuesday is a prime example.

This article Is Sitting on the Fence the Best Investment Strategy Right Now? originally published at Investment Contrarians by George Leong

What Caterpillar’s Big Drop in Earnings Means for the General Stock Market

What Caterpillar’s Big Drop in Earnings Means for the General Stock Market
What Caterpillar’s Big Drop in Earnings Means for the General Stock Market
With the S&P 500 hovering around its all-time highs, I think it’s quite interesting to read some of the latest corporate earnings reports and get a sense of what’s really happening in the global economy.

One of the most international companies within the S&P 500 is Caterpillar Inc. (NYSE/CAT). The firm recently released its third-quarter 2013 corporate earnings report, in which the firm poured some cold water on expectations. Revenue during the quarter was down 18% year-over-year, and corporate earnings were down 44% year-over-year. (Source: Caterpillar Inc., October 23, 2013.)

That’s not even the worst part. The company also brought down guidance for both revenue and corporate earnings for the foreseeable future.

In its corporate earnings release, Caterpillar cites several issues that it’s worried about, including uncertainty regarding U.S. fiscal and monetary policy, the health of economic regions globally (including the eurozone and China), and a lack of demand from customers.

Because revenue and corporate earnings growth is questionable, the company is taking the only smart action it can—reducing its own cost base. Obviously, no company can force a customer to buy their product, but it can keep its operations as lean as possible. To that end, the firm has cut 13,000 jobs globally over the past year, reduced pay and incentives, and initiated the “implementation of general austerity measures across the company.”

Considering Caterpillar is a large firm within the S&P 500 and it has its fingers on the pulse of the global economy, do any of these comments give you hope or confidence that either the domestic or international economies are about to surge upward in growth? Not to me, it doesn’t.

This is where I raise serious questions about the strength and health of the S&P 500. Caterpillar is one of the largest international companies, a component of the S&P 500, and would not be issuing such a weak forward guidance regarding potential for corporate earnings growth unless management was truly concerned about the future.

CAT Caterpillar Chart

 Chart courtesy of www.StockCharts.com

I think that the chart above, which places the price of Caterpillar against the price of the S&P 500 (black line), is very interesting. From late 2006 until early 2008, the S&P 500 moved far ahead of the price of Caterpillar. Then, there was a convergence and both the S&P 500 and Caterpillar literally moved lockstep until the middle of 2010, when Caterpillar outperformed.

From 2010 until mid-2012, Caterpillar continued to diverge from the S&P 500, primarily due to the strong corporate earnings gained from selling equipment to mining companies. Currently, the S&P 500 has continued moving higher, while Caterpillar has stalled.

Generally speaking, markets tend to overshoot, moving from oversold into overbought territory. After reading the outlook for corporate earnings and revenue given by company management, it’s hard to logically believe that Caterpillar’s stock price will accelerate.

If that’s the case, is it more likely that the S&P 500 will decline in order to revert to the mean? In my opinion, if a company that has extensive operations around the world is telling me that it’s extremely cautious about the outlook, I find it hard to recommend investors put new money into the S&P 500 at such lofty levels.

In fact, I think many of these concerns are legitimate, and you will see more companies having difficulty increasing revenue and corporate earnings going forward. While the market is being fueled by cheap money from central banks, at some point, corporate earnings will matter.

Similar to a balloon, it takes quite a bit of work to keep pumping up the numbers, but it deflates very quickly.

To help protect your portfolio, advanced investors might consider using options, such as buying puts, which move up in value when the market or stock declines. Another possibility is buying an inverse exchange-traded fund (ETF) like the ProShares UltraShort S&P500 (NYSEArca/SDS). A note on some of these inverse ETFs: they are great for the short-term, but not well suited to long-term holdings, as they can erode in value and not mimic the exact inverse relationship between the underlying asset and the ETF price.

This article What Caterpillar’s Big Drop in Earnings Means for the General Stock Market originally published at Investment Contrarians by Sasha Cekerevac

Forex Traders Prepare For Central Bank Decisions

Forex Traders Prepare For Central Bank Decisions
Forex Traders Prepare For Central Bank Decisions
As much as we would like to stop speaking, and writing about central banks this week they just cannot be avoided. The US FOMC two day meeting will begin later today, with a statement tomorrow. Although odds makers are saying there is little to no chance that the Fed’s will make any changes in interest rates or asset purchases their assessment of the US economy and the jobs market could cause some volatility. US Dollar Index increased by 0.16 percent in yesterday’s trading session on the back of favorable Industrial production data from US. However, investors are cautious ahead of US Federal Policy meeting, which capped sharp upside while this morning the DX has added 6 points to trade at 79.46. Today, Germany will release its consumer confidence number, which is expected to improve and might limit the losses in the euro. The greenback may remain under pressure on anticipation of subdued economic releases from the US. Yesterday, US manufacturing output barely rose in September and contracts to buy previously owned homes recorded their largest drop in nearly three-and-a-half years, the latest signs the economy’s momentum ebbed as the third quarter ended. The reports showed economic activity was on a weak footing even before a 16-day partial shutdown of the US federal government early in October that is expected to weigh on fourth quarter growth. Manufacturing production edged up 0.1 per cent last month after advancing 0.5 per cent in August, the Federal Reserve said.

Separately, the National Association of Realtors said its Pending Homes Sales index, based on contracts signed last month, plunged 5.6 per cent to the lowest level since December. The decline was the largest since May 2010. The index, which leads home resales by a month or two, has now dropped for four straight months. Realtors believe home resales, which dropped in September, peaked in July and August.

The euro eased below the 1.38 price level to trade this morning at 1.3776 as sentiment seems to shift away from the euro as traders begin to think that prices are overvalued. Many see the euro declining rather quickly after the as the US shutdown begins to be forgotten. Data releases in Europe have been slightly better than expected showing a slow sluggish recovery. The EU is out of the danger zone, but to prosper it must restructure its financial sector, foster growth with new business models and avoid protectionism, a top European Central Bank (ECB) policymaker said yesterday. In a speech to the Asia Europe Economic Forum in Beijing, which was entitled Lessons from East Asia for the euro area, Benoit Coeure said the European bloc was at a crossroads. “In one direction lies the Japanese experience, and in the other direction that of emerging East Asia,” he said. “Europe has emerged from the danger zone. It’s time for us to get our act together, to reform and to grow.”  The ECB has been doing its best to talk up the euro but has taken little action except a lot of talk, sooner or later; the zone will need to show better data and growth.

While around the globe this morning the Aussie took a big tumble after RBA Stevens warned that the Aussie was due to fall below its current prices, which sent traders heading for the hills. The Aussie is trading at 0.9514 down by 59 points while the kiwi remains weak at 0.8275 ahead of the RNZ decision due at the end of the month. The surprise this morning was Japanese retail sales which printed well above expectations supporting the JPY which climbed against the USD to trade at 97.57. 

Chinese Gold Consumption and Production Increasing

Chinese Gold Consumption and Production Increasing
Chinese Gold Consumption and Production Increasing
A recent study released this week reported a big surprise. The buying of luxury goods this year is expected to top last year’s sales, with growth in the Americas overtaking that of China, a worldwide study revealed yesterday. In a reversal of the trend in recent years, spending on luxuries in the Americas is expected to grow four per cent this year, as opposed to 2.5 per cent for China. Ironically, one of the factors driving sales growth in the Americas is tourist spending from the increasing number of Chinese visiting cities like Los Angeles and Las Vegas. Regardless of how you move the data around, the fact remains that the Chinese are driving high end luxury good sales at home and abroad. This supports the recent news that China is surpassing India as the largest purchaser of gold. While industrial demand increases but the demand for private consumption is exceeding expectations. Gold consumption in China, the world’s largest user after India, jumped 54 percent in the first half of 2013, putting the country on track to become the top bullion consumer at a time when demand is contracting elsewhere.

Consumption reached 706.36 metric tons in the first six months, the China Gold Association said in an e-mailed report. Gold-bar purchases surged 87 percent to 278.81 tons, while jewelry gained 44 percent to 383.86 tons, it said. Demand accelerated from growth of 26 percent in the first quarter, according to data from the association, which is funded by miners, refiners, retailers and jewelry makers.

Gold is trading at 1355.20 up a few dollars in the Asian session but has remained directionless ahead of the US FOMC two day meeting commencing today. Gold is heading for its worst year in three decades as some investors lost faith in the metal as a store of value and amid speculation the U.S. Federal Reserve will curb debt-buying. India doubled a tax on inbound shipments and curbed financing to tackle a surge in demand after the metal entered a bear market in April. China is the world’s largest gold producer. Gold is now a short term investment vehicle and less a long term holding as demonstrated by the continued decline in EFT holdings. The weak US dollar is helping to support prices which climbed from below the 1300 price level to the 1350 price in just two days last week and will most likely decline after the FOMC meeting. Silver followed cues from gold to trade at 22.55 but remains in a tight range in the 22.50 level. Copper is trading at 3.262 down by 4 pips this morning; the current price is below its longer term range close to 3.30. Copper fell for the first time in four days before U.S. data forecast to show consumer confidence fell to a five-month low and retail sales stalled as the Federal Reserve starts a two-day meeting today. The Conference Board’s index of U.S. consumer confidence probably declined to 75 this month, the weakest since May, from 79.7 a month earlier, according to a survey. Economists in a separate poll predict the Commerce Department to report today no change in retail sales in September, the worst reading in six months.

 

Crude & Brent, Gasoline and Natural Gas All In The Red

Crude & Brent, Gasoline and Natural Gas All In The Red
Crude & Brent, Gasoline and Natural Gas All In The Red

Crude oil eased on Tuesday after US data printed below forecasts casting a shadow on the recovery on the US economy. Crude oil traded in the red at 98.68 and continued to trade down this morning at 96.48 ahead of inventory numbers due today and tomorrow. The American Petroleum Institute will release its weekly report due later today, with crude oil stocks expected to show a gain of 3.5 million barrels for the week, according to Platts. A day later, the U.S. Energy Information Administration will post its weekly data. According to data from the U.S. Energy Information Administration, U.S. crude oil inventories rose by 5.2 million barrels last week, the fifth largest build of the year, with stocks at the Cushing hub rising for the second week in a row. Over the past four weeks, inventories have risen by 22 million barrels, marking the biggest four-week build since April 2012 and the second largest since February 2009. The crude oil stored at Cushing, the delivery point for the U.S. futures benchmark contract, amounted to 33.34 million barrels in the week that ended Oct. 18, an increase of 358,000 barrels. As noted in an article in the FT, certainly flows of shale oil have been surging from areas such as Bakken, North Dakota and Eagle Ford, Texas, where output has reached 1 million barrels a day. The price of gasoline fell 6.6 cents to $3.294 a gallon in the week ended Monday, the Energy Information Administration said. That’s the lowest price since Dec. 24, 2012. The drop, which was the largest in a month, follows a slim 0.6 vent gain a week earlier. The decline in pump prices comes as gasoline futures have recovered only modestly from last week, when they hit their lowest level since June 2012 on weak demand and high inventory.

In its most current short-term energy outlook, the EIA projected gasoline prices will average $3.42 a gallon this month, down from $3.75 a gallon a year earlier. Gasoline supplies have built up as refiners have in recent months been boosting refinery operations to make more diesel fuel, which is in great demand in foreign markets. Higher processing also yields more gasoline which has lesser demand in foreign markets and has been building up in domestic inventories, weighing down prices. The forecast is based on Nymex crude-oil futures averaging $103 a barrel, up from $89.49 a year earlier. Nymex crude is averaging $101.07 a barrel so far this month amid weak demand during refinery maintenance season.

Brent oil is trading down 24 cents this morning at 109.22. With maintenance schedules winding down and lower prices encouraging refiners to stock up to meet export demand, expect the differential between WTI and Brent to narrow. As Brent is constrained by reduced Libyan and Nigerian shipments, it seems more likely for WTI to rise than for Brent to fall.

Natural gas is trading at 3.648 down by 15 pips as the commodity looks for a bottom to sit between seasons as prices fluctuate on changing weather forecasts. Traders are looking for the most recent inventory report due on Thursday which is expected to show a continued climb in stocks.

EUR/USD Showing Signs of Being Overvalued

Foreign currency and commodity markets traded mixed on Monday in lackluster trading. Although there were two key U.S. economic reports today, investors may have been looking ahead to the October 30 Federal Open Market Committee meeting and decided to pare positions.

This morning, U.S. industrial production rose 0.6 percent in September, its largest increase in seven months. Economists were looking for a 0.4 percent increase according to Reuters. The big story, however, was the drop in pending home sales. According to the National Association of Realtors, pending home sales fell 5.6 percent to 101.6 in September. The dollar trade mixed-to-slightly better following the release of these reports which is a strong sign that investors are waiting for the Fed for guidance.

Looking ahead to Wednesday, the Fed is expected to refrain from tapering in October and November which means investors will likely be looking for language which deals with December. Keeping an option for December tapering open could help underpin the U.S. Dollar over the near-term. Comments on pushing the tapering into March 2014 should be bearish for the dollar.

eur 2

After reaching a major Fibonacci level at 1.3833 on Friday, the EUR/USD weakened. This carried over into today’s trade, producing a sideways-to-lower trade. The inside move indicates impending volatility. Technically, the chart pattern indicates a trade through 1.3792 could trigger the start of an acceleration to the downside.

Euro traders are beginning to question the sustainability of the current rally. They want to see Euro Zone economic data driving the Forex pair higher rather than a weaker dollar. This may be the reason behind today’s lack of interest in the long side.

The GBP/USD strengthened early in the session after an industry report showed U.K. house prices increased for a ninth month in October. Coupled with last week’s better-than-expected 0.8 percent rise in U.K. GDP, the Forex pair should’ve spiked higher, however, the market failed to follow-through to the upside. The Sterling weakened into the close suggesting overvalued prices. Short-covering in the dollar ahead of this week’s Fed announcement may have been another reason for today’s weakness in the Pound.

The recent action in the GBP/USD suggests a topping formation. While speculators have been supportive, the Bank of England has been trying to convince them that the economy is still not strong enough to support current lofty price levels. This may fuel a sideways-to-lower trade until the BoE meets on November 7.

December gold traded flat-to-higher today despite the stronger dollar. This may have been investor hedging pressure in anticipation of a stock market break. Although the main trend is up on the daily chart, the market is trading inside of a major retracement zone at $1342.50 to $1364.09.

This may produce sideways trading action over the near-term. A break through $1342.50 could draw the attention of short-sellers as well as igniting a round of profit-taking. A rally through $1364.09 will be a sign that the current buying is real after several months of weakness.

Oversold conditions helped stabilize December crude oil prices. This helped form a closing price reversal bottom last Thursday, triggering a short-covering rally into a former support level at $98.17. This move may continue until $100.39 over the near-term, but it should not change the trend to up.

Because of a bearish supply/demand situation, short-sellers are likely to show up following a retracement into a favorable price zone. The sluggish economy is expected to continue to hurt demand which may create conditions for a prolonged move down. 

Global Central Banks To Keep Traders Focus This Week

Global Central Banks To Keep Traders Focus This Week
Global Central Banks To Keep Traders Focus This Week
Central banks remain in focus this week. Although the effects are expected to be muted. The FOMC meeting which was expected to be the event of the year after the Fed’s held fire in September traders immediately turned their attentions to the end of the October meeting. This was going to be the big one, the Feds were for sure, positively, without a doubt going to announce “tapering”, or so investors had convinced themselves until once again surprise took investors by the seat of their pants. US politicians were unable to come to terms on a budget or the debt ceiling and forced a government shutdown on October 1st which lasted an unprecedented 16 days. This shutdown results in a lack of data and a huge unknown for speculators and Fed members as no one knows or can access the damage to the US economy due to the government closure. The delayed data is slowly being released with the nonfarm payroll data being released just last week. Federal Reserve policy makers will draw the limelight as they start a two-day meeting on Tuesday after which they are expected to signal ongoing stimulus to help the US economy get over the speed bump created by lawmakers’ fiscal battle earlier this month. The US dollar is trading at 79.25 flat this morning but remaining weak after consumer confidence tumbled on Friday.

On the calendar this week is also the Bank of Japan meeting. The yen is trading at 97.57 with the dollar gaining 17 points this morning. The JPY continued its three-week decline against the euro after Deputy Governor Kikuo Iwata reiterated the Bank of Japan’s commitment to unprecedented monetary easing. The yen weakened against all its major peers on prospects the BOJ will say after a meeting this week it plans to continue buying more than 7 trillion yen ($71.7 billion) in Japanese government bonds each month to end deflation. The BOJ will continue to buy bonds until it achieves its 2 percent inflation target, Deputy Governor Iwata said yesterday in Shimonoseki, western Japan. The country’s monetary and fiscal policies are at a critical point for ending deflation, he said. Policy makers hold a one-day meeting on Oct. 31.

The Australian and New Zealand dollars gained. The NZD is trading at 0.8312 and the Aussie is at 0.9610 up by 26 points. New Zealand’s currency gained on speculation central bank Governor Graeme Wheeler will signal interest-rate increases as he decides on monetary policy this week. Reserve Bank of New Zealand Governor Wheeler will probably keep the key interest rate at 2.5 percent on Oct. 31, according to all 15 analyst forecasts compiled by Bloomberg. Traders see an 83 percent chance policy makers will raise the cash rate to 2.75 percent or higher by June. Reserve Bank of Australia Governor Glenn Stevens is scheduled to speak tomorrow. He and his board will next meet on Nov. 5, where there’s a 94 percent chance they will keep the benchmark rate at a record-low 2.5 percent, according to interest-rate swaps data compiled by Bloomberg.

Oil Speculators Pump and Dump Crude Oil

Oil Speculators Pump and Dump Crude Oil
Oil Speculators Pump and Dump Crude Oil

Basic fundamentals seem to have returned to the energy markets after speculators pushed oil prices to ridiculous highs taking advantage of geopolitical concerns to maneuver oil and gas prices. Crude oil just recent touched 110 and closed the spread with Brent oil while demand and production remained on track. Global growth continued to get downgraded which reduced the forecast for oil demand through 2014, but speculators kept pushing up prices. Last week, speculators dumped energy assets in droves, letting oil for to an unexpected price in the 96.00 range until it recovered to trade above 97 and this morning it remains well into the 97.00 range at 97.66 while Brent oil is down from 112 to 107.21 trading slightly in the green this morning. Oil prices continued to tumble during last week: WTI fell by 2.94%; Brent oil, by 2.74%. As a result, the gap of Brent oil over WTI slightly widened: The premium ranged between $9.08 and $12.17. The EIA’s weekly update last week showed a rise in oil’s stockpiles by 3.7 million barrels. Oil inventories rose slight by 3.7 MB and reached 1,827.0 million barrels. The linear correlation between the shifts in stockpiles has remained stable at -0.20: this correlation implies that oil price, assuming all things equal, may decrease next week. But in order to better understand the developments in fundamentals we need to closely look at the demand side as well as supply.  Oil imports decreased by 0.8% last week. The weekly shifts in oil imports have a mid-strong negative correlation (-0.226) that suggests oil price may decline next week. Conversely, oil production rose by 0.4%. Refinery inputs sharply fell by 1.2% last week. In total the demand was much lower than the supply; furthermore, the difference has widened – this may pull down oil prices as the oil market in the U.S continues loosen. The facts are pretty straight forward, the Saudi’s are producing record levels of oil while the US is increasing its production daily. There is more oil flowing than required and the possibility of sanctions easing in Iran will put more oil into the market place. Although the world economic situation is improving, it will be many long years before China returns to its previous requirements and with the increased demand for natural gas, there is less need for crude oil.

As the US Department of Energy approves more projects to export US natural gas and as more reserves are discovered around the globe the cheap energy will start cutting deeply into the demand for coal and oil. Natural gas is trading at 3.749 down by 64 points as temperatures did not turn as cold as forecast, with residential demand the major use of US natural gas for the time being there is little demand except for heating and cooling but that is changing quickly. About 49 percent of U.S. households use gas for heating while 39 percent use electricity, according to the Energy Information Administration, the statistical arm of the Energy Department. Gas inventories expanded by 87 billion cubic feet in the week ended Oct. 18 to 3.741 trillion, above the five-year average of 67 billion for the period, the EIA said yesterday. Analysts predicted a gain of 82 billion. A supply surplus to the five-year average widened to 2.1 percent from 1.6 percent.

Gold, Silver and Copper Ease Ahead of FOMC and US Data

Gold, Silver and Copper Ease Ahead of FOMC and US Data
Gold, Silver and Copper Ease Ahead of FOMC and US Data
As gold traders begin to look at the week, the Bank of Japan, the Reserve Bank of India, the Reserve Bank of New Zealand and the US FOMC all take center stage. Gold is trading at 1350.70 down just $2 in the Asian session on Monday as trades book profits begin to take position for the week. The prices of gold and silver continued their upward trend during last week with silver surprising traders and easing 89 points to trade at 22.55 as it almost broker the 23 level last week. Their rally coincided with the depreciation of the USD against the euro and the JPY. The US nonfarm payroll report didn’t meet expectations with only 148k jobs added in September; Jobless claims slipped by 12k to 350k. The little progress in the labor market could influence FOMC members and reduce the odds of the FOMC tapering QE3 in the near future including the upcoming FOMC meeting in just a few days. Last week, gold price increased by 2.89%; with the average rate ending near $1,338.84 which was 3.49% above last week’s average. Gold ended the week at $1,352.30. Silver price also rose by 3.32%; further, the average weekly rate was $22.60 which was 5% above last week’s rate $21.88.

For the near term, gold investors are bullish but this is not expected to last much past the FOMC meeting. Traders for the longer term are keeping a close eye on gold holdings of SPDR gold trust ETF which dropped again for the eighth consecutive week. During October, so far, the ETF’s gold holdings fell again by 2.62%. The ETF was also down by 35.45% during the year (up-to-date). Current gold holdings are at 872.02 tons – the lowest level in recent years. If the ETF’s gold holdings keep declining, this may signal the demand for gold as an investment continues to falls. The ongoing rise in demand for gold and silver in Asia is likely to keep the prices of gold and silver from tumbling down in the near and short term. Precious metals have fallen nearly 20% this year as investors dumped gold holdings for better-performing stock markets and on fears that the end of easy money from the US central bank would dim the metal’s inflation-hedge appeal. In the past two weeks, however, gold has gained about 6% as weak US data and budget battles in Washington looked set to deter the Fed from scaling back asset purchases. Russia reduced gold reserves for the first time in a year in September as Mexico cut holdings for a 17th straight month, according to International Monetary Fund data. Kazakhstan expanded assets for a 12th month. Russian reserves declined about 0.37 metric ton to 1,015.1 tons, while Canada and Mexico also sold, data on the IMF’s website showed. Kazakhstan’s reserves expanded 2.52 tons to 137.04 tons, the data showed.

Copper and the metals pack are also trading in the red this morning which is weighing on silver also. Copper is trading at 3.264 or at 7171.25/ton this morning. Copper dropped before industrial output data from the U.S. and on concern that credit is tightening in China. The U.S. will report industrial output today that may be unchanged from a month ago and after orders to manufacturers unexpectedly dropped in September and as households were more glum in October for a third consecutive month.