Commodity markets had another volatile week, with many beginning in positive territory only once again to be caught up with the reality of a world that is heading straight for a prolonged slowdown.
Some risk appetite returned early on as stock markets made solid gains on the back of US President Barack Obama's initiatives. But as the week progressed markets once again got caught by negative economic news. IMF said the economic pain could be the worst for 60 years and that 50 million people globally could lose their jobs.
US property market is still in the deep freezer with prices continuing to fall and new home sales so weak that it will take a year to clear the glut of unsold properties. Meanwhile, in Europe, the European Commission said its index of consumer sentiment dropped to a record low in January and George Soros said that the euro may not "survive".
WTI Crude Oil for March delivery began the week on a positive note reaching $48.60 before selling took it back down into the range where it has now spent the last two months.
News that the speculative long position in the market is almost at levels seen during last summer's buying frenzy and a continued build in US inventories unnerved a market that seems to have placed all its bets one way.
Crude owned by exchange traded funds (ETFs) stands above 100 million barrels and the large contango or negative carry could lead to unwinding unless we see a move out of the current range soon. This carry has cost ETF investors 20 per cent since the beginning of December on top of a 16 per cent drop in price.
It is difficult to see any significant upside to crude near term and there is distinct risk of seeing the low $30s again. Technically March WTI crude trades in a $38.00 to $47.30 range defined by the contract low and 50-day moving average. A break below $38 could signal weakness towards $32.40, which is a 10-year trendline support. Likewise a break above $47.30 will target $50 and ultimately $54.
Against this backdrop gold's status as a safe haven continued to attract new friends and rallied past the $900 mark on continued strong demand for ETFs, gold coins and small investment bars. Demand for jewellery continues, not surprisingly, to be weak as illustrated by the world largest gold consumer, India who saw a 90 per cent drop in import in January.
The trigger for this latest move came as investors in US government bonds began to suffer from indigestion after an auction did not receive the demand the market had hoped for. More worryingly an editorial in a government-owned Chinese newspaper raised the bar by saying the US should not expect China to continue to fund their deficit.
Stay long the April future above $900 as the technical break out now targets $950 ahead of $1,000. Only word of warning is the large one way bet that has been placed through ETFs. Any negative news like this weeks rumour about central bank selling could have a major negative impact but know your stop level and stay with it for now.
High Grade Copper, a good economic activity indicator, has slumped 10 per cent from the recent highs on continued inventory building amid slowing demand. A break below $137.30 on Comex Copper for March delivery will see renewed selling towards the contract low at $125 and maybe even down to $114.
Cocoa futures on NYB-ICE continue to rally and made new highs during the week. Low supply from the Ivory Coast, the worlds' largest producer, continues to support prices. The West African country supplies about 40 per cent of the world's cocoa but the current harvest has been disappointing with arrivals below last season's level. Stay long above 2,715 on the March future and look for a move towards $3,000.
Ongoing concerns about the crop in Argentina continue to be the main focus for corn and soybeans market. Daily weather forecasts are being analysed very carefully for any change in the ongoing drought situation, which has lead to "severe water deficit" warnings being issued. The risk near term is that the market will come to the conclusion that the bad news has been priced in opening up the risk of a downside break. Corn for March delivery is stuck in a tighter and tighter range between $375 and $395.
A break through support would signal an end to the month long uptrend and a move back towards the low $300's is a possibility. Less than a year after rough rice traded $24.68 per hundredweight and rationing was introduced in several countries the picture has reversed completely and growers are feeling the pain. Weak export sales is the main driver and this month we have seen lower prices. The March contract on CBOT currently trades around $11.70 and it could drop another 10 per cent.
The author is a commodity analyst with Saxo Bank