Calmer markets help commodities

It has been a quiet week on the markets with short covering and position adjustments being the main theme. Record low interest rates entice investors back into stocks and commodities.

The beleaguered euro has been one of the beneficiaries of the calmness finding a bid primarily from short covering activity. Some markets, including the S&P 500 Index, broke back above the important 200-day average, which added to the near-term sentiment.

Warning signs still persist and risk adversity still lingers just below the surface. The IMM this week in a comment said that the financial stress stemming from fiscal worries poses a major downside risk to the global economy. The US states collectively face deficits in the region of 30 per cent of all state budgets and a rise to 35 per cent is forecast for 2011 and 2012, according to the US Centre on Budget and Policy. With state spending cuts expected, consumer confidence in some of the hardest hit states is set to suffer as a consequence, especially as the stimulus from government interventions will fade in the coming months.

This economic dilemma may only come to the front after the mid-term election this autumn, but is worth keeping in mind.

The Reuters Jefferies CRB index advanced three per cent over the past week, with coffee and natural gas making solid gains, both now showing double-digit gains over the past month.

WTI Crude oil continued to recover taking its lead from the falling dollar. The 200-day moving average on the continued front month at 76.85 was breached but a surprise build in inventories took it back below. The front month of July has now clawed back half of what was lost during the May sell off. The 50 per cent retracement is at 78.45 and that will probably cap the upside for now. Look for support at 73.95 followed by 72.65.

Gold spent the week consolidating further in its 1,220 to 1,254 range before finally making fresh highs on Friday. Sovereign debt worries, central banks raising their holdings and record low interest rates keeps attracting new buyers to gold and only a move below 1,195 could trigger a bout of long liquidation.

A sustained break above resistance at 1,254 will bring 1,300 into focus, while support can be found at 1,220 followed 1,195.

Overall, the agricultural sector has come back to life these past couple of weeks. Two leading organisations, FAO and OECD, forecast above average price rise over the next 10 years due to rising energy prices and rapid growth in developing countries combined with an increased population.

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

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