Commodity markets kicked off the New Year by making strong gains as exceptionally cold weather across the Northern hemisphere gave energy and other sectors a boost.
This time of year everyone from hedge funds through to the private investors get back into the markets looking for profitable investment opportunities. Given the strong performance of commodities in 2009 where the CRB index rose by 30 per cent and investment flows into the sector rose by more than $60 billion (Dh220bn) it was and is expected that the sector will have another year with positive returns.
Friday's unemployment data showed another steep drop in unemployment and gave the market a clear indication that the recovery among developed nations could become a long drawn out event and that we have to look towards the emerging economies for support.
On that note speculation emerged during the week that the Chinese Government would begin to tighten monetary policy to reduce inflationary risks after a record gain in lending. This could lead to a reduced demand for raw materials and will be watched very closely once it occurs. What it highlights is the risk of reversals despite the general bullish attitude to commodities is ever present.
These expectations combined with very cold weather this winter have meant that particularly the energy sector began the week strongly with crude testing the 2009 highs and heating oil breaking well clear and making new highs. Crude oil began its rally three weeks ago rallying 18 per cent to a new high of $83.52 before profit taking occurred before and after the US unemployment data. The weekly storage numbers did not have a major impact but the cold weather no doubt have given market bulls an extra argument for buying the black gold.
Technically, WTI crude oil for February delivery reached overbought territory during the week, which left the market exposed to a correction. Given the current weather situation, support should not be far away. Initial support is located at $80 which also coincides with the level Opec has seen as being sustainable and acceptable given the current economic level of activity. Below that next level is $77.80 followed by $76.05. Resistance can be found at $83 followed by the psychological level of $85 and trend line at $87.10.
Gold began the week with less conviction than the energy sector but the strong correction seen towards the end of 2009 has given new buyers a better level to enter and some upside pressure to prices was seen during the week. Resistance at $1,142 ahead of 50 per cent retracement of the recent sell off at $1,151 needs to be negotiated before a new attack on the $1,200 level can be initiated. Before that happens look for the market to range trade with support coming in at $1,171 ahead of $1,142.
- The author is Senior Manager CFD and Listed Products with Saxo Bank
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