Double-dip recession and deflation drive sentiment

The global recovery is struggling for momentum as weak economic data from the US and China has reignited talk about a double-dip recession.
With stock markets selling off investors continues to shift investments away from riskier assets into bonds. This process has pushed the yield on two year US government bonds to a record low while 10-year yields is trading below three per cent. The Shanghai stock index, well entrenched in a bear market, continued its downward move making a new low for 2010.
The Reuters Jefferies CRB index had a poor week dropping by 4.2 per cent as all major commodities apart from corn, wheat and sugar ran into selling. In our Q3 forecast we have a negative outlook for the index we fear the Chinese slowdown could accelerate the sell-off, especially in base metals and the energy sector. After a strong rally from the 247 low it will find resistance at 268 before heading lower towards 235 at year end.
The Baltic Dry Index is down by 46 per cent this past month primarily as rates for CapeSize vessels, the primary vessels used to ship iron ore from South America or Australia to China, has slumped by 60%. The Q3 benchmark price for Iron ore is record high and steel makers in China cannot carry the cost as demand from clients is weak. Forward Iron Ore prices already indicate that Q4 will reflect the lower demand situation so a pickup in traffic and CapeSize freight prices is not expected before Q4.
Staying on the freight theme the lack of demand for hiring VLCC (Very Large Crude Carriers) which can carry 2 million barrels has seen charter prices slump back below USD 30,000 per day. Just a month ago VLCC’s were chartered for as much as 73,000 per day. This past week as an example 15 carriers where chasing one tender putting downward pressure on the price. This is probably a good reflection of the current demand situation which has been weakening amid worries about a Chinese slowdown and austerity measures in Europe following the sovereign debt problems.
The price of Crude oil dropped eight percent this week as bad economic news from the world’s two biggest oil consumers removed the support that had been driving prices higher the previous three weeks. The technical picture also looks pretty negative as the graph below illustrate. The break below 75 could be signalling a move down towards the May low at 67.15 and possibly 62.
The WSJ this week reported that India’s import of Gold looks set to fall by 40 percent in 2010 as high prices has eroded demand in the world’s largest consumer. Another reason behind the drop in imports has come from Indian consumers who are selling their old gold jewelry at current high prices. This highlight the importance of the financial flow in gold, primarily through Exchange Traded Funds and any sign of a let up in the flow into gold ETFs could be the trigger for a correction.
With future inflation forecast sharply reduced and talks of deflation returning many have been scratching their heads in disbelief over the strength in Gold. It continues to find support from financial investors as interest rates are at record low levels and safe havens are being sought. This week however despite stock market weakness we failed to see new highs, in fact the last two attempts to scale back above 1,260 were quickly followed by a 30 to 35 dollar sell off. This indicates that profit taking has begun to have a visible effect and caution about additional gains is recommended.
On Thursday a near $50 sell-off on the back of nothing drove prices down to a five week low at 1196 which is now a double bottom and important support. During the week we have seen the Euro stabilise and the dollar weakening by nearly four per cent. This indicates that the safe haven buying on the back of risk of a new banking crisis has been somewhat reduced hence leaving gold exposed to a correction. A move below support at 1,196 will bring 1,160 into focus being the uptrend from October 2008. Resistance can be found at 1,247 followed by 1,270.
Corn futures rallied strongly this week after farmers planted less grain than expected leading to speculation among traders whether this year’s harvest actually will top the 2009 record. At the same time stockpiles shrank at a faster pace than last year. This has reduced worries about a supply glut as demand continues to be strong, both from export and from increased production of Ethanol.
Corn for December delivery rose from a two year low at 343.75 to finish the week 7% higher at 384.5. Resistance can now be found at 387 and 393 followed by 200 day moving average at 402.

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