Commodity market remains mixed

Commodity prices had a mixed week, helped earlier by renminbi appreciation but later struggling as focus once again shifted to the fragile global economic recovery.

The pace of the US recovery was put into doubt as both existing and new home sales showed much weaker readings than had been expected as stimulus began to be removed. The Federal Reserve left key rates unchanged as inflation was trending lower and at the same time indirectly expressed their concerns about the fiscal problems in Europe.

The big news from China that it was going to end its two-year peg to the dollar turned out to be more headline than actual action as the first week only yielded a 0.6 per cent change against the dollar. The move seems to be a compromise between appeasing foreign governments and not to upset the domestic export industry, which will face increased competition as the renminbi strengthens. China's chief auditor warned that high levels of local government debt could derail the country's economy. This is the first time that China has disclosed the level of local government debt and some could even be more troubled than Greece. This adds to the risk of a Chinese slowdown which could deflate some of the bubbles that have built up in the economy, especially in infrastructure, construction and housing.

Meanwhile, in Europe, sovereign debt fears re-entered the front pages with yield spreads between the safe haven of German government debt and the PIIGS nations widening again. The cost of hedging $1 million worth of Greek sovereign debt, through a five year CDS, rose to $112,500 per annum indicating a high risk of default.

The Jefferies Reuters CRB index ran out of steam after hitting a high at 267 on Monday when the renminbi news hit the wires. Main losers on the week were the energy sector, led by natural gas, while the soft sector such as sugar, cocoa and coffee showed strong gains which prevented the index from falling further. A move below 257 on the CRB index could bring the May low at 247 back into focus.

The International Energy Agency said last week that oil and natural gas markets look to be oversupplied until 2015 with "comfortable spare capacity" available. On the same day, the weekly storage data showed another surprise increase in inventories leaving the crude market exposed to the downside.

Crude oil for August delivery ran into resistance just below $80 which represents a 50 per cent retracement of the May sell-off. The combination of increased supplies and stronger dollar eroded recent support resulting in lower prices. The speculative long position in WTI Crude on Nymex has almost disappeared which leaves the market neutral for now. Support can be found at 74.75 followed by 71 while resistance is 200 day moving average at 77.15 followed by 80.

Gold made a new record high at 1265.30 last week, which subsequently led to another bout of profit taking. Support from inflation fear is off the radar but record low interest rates and the sovereign debt fear lingers on and continues to support prices. Total holdings in gold ETFs stays above 2,000 tonnes and even made a new record high this week.

With the safe haven theme still alive, gold will continue to find new buyers who want to join the ride. The risk of a correction has, however, increased as more and more professional investors raises their concerns about the price action, fearing that a repeat of the May sell off elsewhere will drag gold down with it.

Going into next week, gold will continue to track the risk on/off situation and should therefore track moves in stock markets and the dollar. Technically, the uptrend is firmly in place and long positions should be maintained above 1,195 and more importantly 1,155. Near-term support is 1,215 while resistance is at 1,268 followed by 1,300.

The 7.5 per cent drop in the CRB Index hides dramatic differences in performance but overall the energy and grain sectors have been suffering while softs (minus sugar) and precious metals have been doing well.

Roughly speaking, softs and grains have both been primarily affected by weather situations, while energy and precious metals have been in a response to global economic developments.

- The author is Senior Manager for CFD and Listed Products with Saxo Bank. The views expressed are his own

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