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27 February 2024

EU sovereign debt fears rule markets around the world

By Ole S Hansen

The early February rally was brutally halted as renewed dollar strength and growing strains in sovereign debt markets weighed on sentiment and prices.

On Thursday, Portuguese and Spanish stocks suffered their biggest daily fall since 2008 as the worries surrounding Greece spread to other weak economies within the euro zone. This fear led to sharp falls in shares across continents and a worldwide flight to the safety of the US dollar and treasuries. The euro traded down to a seven-month low and all projections about a year of continued dollar weakness have all but disappeared, for now at least.

Commodity markets began February with robust rallies on the back of improved manufacturing purchasing managers indices (PMIs) data from the US, Europe and China combined with Australia's decision to leave its official rate unchanged. It unfortunately turned out to be short-lived as renewed dollar strength removed support and the selling that followed indicating traders concerns about being too heavily exposed with so much focus on fiscal worries.

The very important monthly release of US unemployment data on Friday added some calm to the market as the number came within the expected range.

The Reuters-Jefferies CRB Index of 19 raw materials has now dropped more than 10 per cent from the January 6 high and could technically be in a bear market phase falling back to levels not seen since October 2009. The sector that primarily drove the index lower was metals with silver and copper loosing nine and six per cent, respectively.

Silver has underperformed gold by more than 15 per cent during the past couple of weeks and this ratio needs to stabilise in order for the market to begin to look for a turnaround. On Thursday, both silver and gold prices sliced through previous double bottoms signalling further weakness near term.

Gold has surprised many by the ferociousness of the sell off after the firm rejection at $1,125 during the week. The fact that gold is selling off on the back of renewed flight to safety has left many puzzled. As mentioned above it has been outperforming riskier metals such as silver and copper but the overall selling pressure from traders trying to lock in profit to offset losses in other markets has been the main focus. The world's largest gold ETF, New York's SPDR Gold Trust reported a drop in its holdings of 7.37 tonnes during the first four trading days of February after falling 21.7 tonnes in January.

Technically the break below the double bottom at $1,075, which triggered waves of technical selling, leaves it open to further losses with crucial support between $1,026 and $1,022 being the next focus point followed by $1,000. The factors that drove gold to its record highs in 2009 still exist and should the ongoing sovereign debt issues turn into a full-blown crisis of confidence gold will shine again. For now though a concerted scramble to reduce exposure has left it open to further setbacks with $1,075 now major resistance.

Silver, as mentioned, has been taking the brunt of the recent selling having retraced almost 23 per cent from the December 2009 highs. Silver suffer from lack of liquidity and being an industrial metal the slow recovery currently under way has eroded some of the strong support seen up until recently.

The move through the 38.2 per cent Fibonacci level at $15.24 leaves it exposed to $14.00. High grade copper, the biggest gainer in 2009, ran into technical selling as $300 gave way. The upcoming Lunar New Year holiday in China, combined with the strengthening dollar, has left it exposed to a correction. We are looking for support at $265 and $250 on the futures contract for March delivery.

Crude oil, just like other commodities, saw a quick setback from the $78 level reached earlier as continued weak demand continues to push the recovery story further out. The weekly storage date surprised the market once again by showing another increase in stocks. Some important technical levels will decide the near-term fortunes of the energy sector with critical support on March crude at $72.40, March heating oil at $189 and March gasoline at $190 keeping the markets from turning lower. Crude have so far bounce three times from the $72.40 level and the fear is that a break could trigger additional technical selling towards the December low at $67.45.

The author is Senior Manager for CFD and listed products at Saxo Bank. The views expressed are his own


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