Commodity focus: energy and agriculture go their separate ways

A deteriorating outlook for world growth following disappointing US and Chinese data sent commodities back on the slide while agflation is still a risk following the surge in the price of wheat and other soft commodities.

The major catalyst for the market last week was the US Federal reserve lowering their economic outlook and Chinese industrial output slowing down at a time where inflation is rising.

In addition the US saw its trade deficit widening as imports from China jumped leading to renewed worries about tensions between the two big economies.

Investors continued to reduce risk with the main beneficiaries being secure government bonds with the yield on two year US government notes dropping below 0.5 percent.

Not all bond news was supportive as the indebtedness of some European states where highlighted as spreads over secure German bonds began to rise again.

On currency markets the dollar regained its footing versus the Euro rising by 4.5 percent to 1.2750. Strongest of them all however was the Japanese Yen which rose to a fifteen year high of Y 84.72 versus the dollar.

Corporate Japan is operating on the assumption of a USDJPY above 90 for the next six month so the current levels hurts and some kind of verbal or actual intervention from the Bank of Japan can be expected should this strength continue.

The risk aversion lead to the usual reaction in commodities with the energy and industrial metals losing support while gold got the catalyst to move back to the top of the recent range. The Reuters Jefferies CRB index finished the week 2.2 percent lower on the week with the major movers seen above.

Crude oil crashed back into its 70 to 80 dollar range having failed to gain any upside momentum from the positive break out the previous week. With the two largest consumers of oil both slowing at the same time the upside seems limited and both OPEC and the International Energy Agency have been voicing their concerns about global oil demand growth.

Although they both forecast a growth in demand for 2010 between 1 million and 1.8 million barrels per day the market paid most attention to the statement that concerns about a slowdown in global activity in the second half posed ”a significant downward risk to the forecast”.

WTI Crude oil for September delivery lost more than seven percent on the week with near-term support showing at 73.40 followed by 71.50. Resistance can be found at 80 before 83.40.

Global wheat markets continued to gyrate with the ongoing drought problem in Russian which has now affected an area the size of Portugal and has lead to an export ban lasting until December.

The USDA estimates that Russia will produce 25 to 30 percent less this year and the outlook for 2010 is still very uncertain as farmers will sow only 12 million hectares of winter grains compared to 18.5 million in the previous two years.

US farmers will reap the benefit from the Russian export ban and reduced production as export is already surging expecting to reach 33 million tons this crop year from 24 million the previous.

Adding to this export surge is the catastrophic flooding in Pakistan, the second largest grower in South Asia, which may have damaged 500,000 tons of wheat and disrupting the winter crop planting which is due to begin in October.

The speculative long position of wheat on CBOT rose to 27,000 lots as of last Tuesday almost equaling the levels seen during the most recent surge in 2008 where the price of wheat reached 13.3 dollar per bushel compared to the current price of just 7.5.

It shows how much of the initial rally was caused by short covering after hedge funds and others had been holding a short position during the past 18 months.

Even more pronounced is the rise of interest in buying corn with many seeing it outperforming wheat during the months ahead.

Gold once again benefitted from “risk off” breaking back above the July high at 1,218 as investors returned to the metal following the recent correction. Investors in gold ETFs held their nerve during the correction with only a small reduction in the total invested.

Continued stock market weakness is required in order to see a new attempt in reaching the record high at 1,265 as the dollar recovery will drag the price in the opposite direction.

Technically a move back above 1,224.5, being tested at the time of writing, should open up for an attempt on 1,265 followed by 1,276 while support comes in at 1,190 followed by 1,157.

The writer is Senior Manager for CFD and listed products at Saxo Bank

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