Uncertainty keeps investors at bay

Investors continue to blow hot and cold as the economic outlook remains uncertain and the sovereign debt problem is not going away. The dollar rally ran out of steam during the early part of last week as traders decided to book some profit ahead of the monthly US employment report.

A record large speculative short position in euros has increased the risk of a swift short-covering rally. So far, the euro at 1.374 dollars has stopped it from making any further progress and dollar buyers emerged after the report, assuring a relative strong close on the week.

The Greek debt office finally managed to sell €5 billion [Dh25bn] of 10-year bonds with the issue being heavily oversubscribed. It, however, came at a very high price, some two per cent above Portugal and double the rate paid by Germany. With another €20bn of debt falling due in the coming weeks, investors will be watching Athens' commitment to fiscal tightening closely.

The price of crude oil has been trading close to $80 this past week looking for the catalyst that can drive it up towards the January high at $84. Inventory levels are largely unchanged and are expected to stay that way in the coming weeks.

One worrying sign was news out of China that refineries there will be scaling back crude runs in March. The cut in runs has been explained by a large buildup in unsold stocks of products, such as heating oil and petrol, as supply has outpaced the growth in demand. This buildup comes at a time when the stockpile of products in the West is already at high levels. Until inventories begin to draw properly, the current range for crude oil looks set to prevail with dollar movements being the main source of inspiration.

Gold moved higher this week, helped by a temporary reversal of the recent dollar strength combined with news that the Russian Central Bank would be looking to divert additional reserves into the yellow metal. ETF demand has picked up recently, indicating continued retail support for the market and the large overhang of speculative long positions on Comex has been reduced. The next obvious upside target is the January high at 1,162 and support can be found at 1,125 followed by 1,107.

Silver has been the highflyer recently, reaching the highest level since January 22, and once again shows that it follows gold but tends to outperform in both directions. The current range is between $17.05 and $17.55. The ratio (gold/silver price) has now come down from $71 to $65.70, giving silver a 7.5 per cent lead over gold during the last month. We are looking for support on that ratio down towards $65 where we would be looking for gold to begin a new round of outperformance, which overall would indicate a reversal of the recent rally on both.

The earthquake in Chile triggered a spike in copper prices on concerns that mines and thereby near-term supply could have been affected. Chile produces one-third of the global output. As the mines are located in the north, they remained unaffected by the quake. Codelco, the world's largest copper producer, estimated its output to be impacted by less than 0.5 per cent of annual production.

Despite the initial sell-off following the spike, prices have held firm and now sit 20 per cent above the lows from a month ago. Inventories are still rising albeit at a slower pace while cancelled warrants for copper on the LME remain high. Short term, we are looking for the metal to trade in a $329 to $350 range with economic activity indicators and the dollar being the main drivers.

The price of corn has slowly continued to recover from the early April low of $359. Corn has since January been trying to recover from the 16 per cent sell-off that was seen after the WASDE report that showed an unexpected increase in production. Technically, the market has still got a gap to close between $396 and $403 on the CBOT contract for May delivery. The crop production report will be released on March 10 and there is speculation that the USDA will reduce the numbers from those reported in January, thereby lending support to prices.

 

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

 

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