Economic outlook lifts commodities

Ole Hansen (SUPPLIED)

Positive manufacturing data from China, Europe and the US drove stock markets to a new 18-month high with the S&P showing the best Q1 performance since 1998.

This continued appetite for risk helped the euro to recover 1.25 per cent ahead of the US unemployment report due for release on Friday while many markets were closed for Easter. Only cloud on the horizon came from the bond market with Greek 10-year government yield back above 6.5 per cent as the latest auction of seven-year debt did not go that well. This has left the market somewhat concerned that Greece will struggle to finance its budget deficit.

The US Government bond yields also rose in reaction to the strong manufacturing data which some believe will speed up the end of the very low interest rates environment that has remained in place among many developed economies. The yield on the 10-year benchmark US Treasury rose to 3.87 per cent and supply worries combined with the above assumption on official rates could put four per cent under pressure, something that is worth keeping an eye on as the impact could be far reaching.

Commodities had a very good week with the Reuters CRB index rising 3.2 per cent on a broad based rally aided by the weaker dollar and the prospects for economic growth. Crude oil surged to a 17-month high finally making an attempt on breaking the range that has prevailed for months. Negative news on the weekly supply data was all but ignored indicating that the market is being driven by momentum and future expectations.

The near month of WTI crude rallied 5.4 per cent on the week reaching $85.37. How much of it was short covering ahead of the long weekend will be revealed next week but for now the target of the break out is 86.00 with an outside chance of momentum carrying it forward to $90 which is 50 per cent retracement of the 147.27 to 33.20 sell off. Some consolidation is however soon expected with support coming in at $83.15 ahead of $81.75.

 

Natural gas

Natural gas saw the first weekly rise in eight weeks as the weekly storage data showed a smaller increase than expected helping the market to a near six per cent rally on Thursday. The market has been oversold for a long time and given the rally elsewhere short sellers decided to book profit ahead of the long weekend. Failure to breach 4.17 next week could see sellers re emerge. However, additional support could emerge from hedge funds and other investors as they may decide to book profit on what has been a highly profitable ratio trade between long crude short natural gas.

 

Gold

Gold rallied to a two high last week reaching 1,128, a three per cent gain on the week, on a combination of a general favourable appetite for commodities, a small pickup in ETF flows and a weaker dollar. Gold measured in dollars has held up very well despite the dollar strength seen over the past month.

The upside, however, still looks limited as momentum seems to have disappeared with investors focus having shifted towards silver (+seven per cent), platinum (+four per cent) and copper which rose a whopping six per cent this week reaching a new 2010 high in the process.

Failure to breach previous highs will make investors nervous about a deeper correction. On that basis we need to see $1,133 but more importantly $1,145 broken soon in order for the rally to gain some momentum. Support once again around $1,100 followed by $1,092 and $1,085.

 

Grains

Grain and oilseeds market slumped on Wednesday as the US Department of Agriculture's report on "Prospective plantings" showed a forecast for a bumper crop, normal weather conditions permitting.

Large amount of soybeans and corn is expected to be planted by US farmers this year. Acreage used for corn will be the largest since 1946 and soybean acreage will be at a record high. Soybeans were not helped by forecast about an already large crop in South America which will make export tricky considering the current dollar strength.

Corn and wheat made new lows for 2010 and are now down around 18 per cent on the year while soybeans are down 11 per cent.

 

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

 

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