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Weekly Commodity Update

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Economic data erodes support

Fri, Oct 2 2009, 13:48 GMT
by Saxo Bank Strategy Team

Saxo Bank

Commodity markets began October on the defensive with stocks weaker on the back of worse than expected economic data.

In the days ahead traders will be watching the S&P 500 stock index closely after the break below USD 1,034 on Thursday. Activity reports from purchasing managers in the US, UK and the euro zone have left the markets struggling ahead of the US Q3 earnings season which kicks off on October 7. The unemployment rate rose to a 26 year high as employers continue to cut jobs. Next Wednesday consumer credit which last month fell by a surprising USD 21.6 bn will be watched closely.

Meanwhile the Euro has begun to weaken somewhat against the dollar falling to EUR 1.4480, a three week low, ahead of important support at 1.4440. At the same time we have seen the yen strengthen against both the dollar and the euro which normally indicates that risk willingness is declining.

Crude Oil reacted strongly to the weekly U.S. storage data rallying back to the USD 70 level after having reached a low of USD 65. For now the upside seems pretty limited as economic data during the week indicated that the U.S. economy is still in the midst of the recession. Also the uncertainty about the direction of the dollar and stocks will play its part in keeping the upside capped for now.

Technically crude oil for December delivery is stuck in a range between trend line resistance at USD 71.90 and 100 day moving average support at USD 67.80. The outer range is now USD 65 to USD 75.

Natural Gas traders returned to the supply situation this week after a month long rally had elevated prices by 67%. The USDA said that underground supplies of natural gas were up 64 billion cubic feet to 3.589 trillion cubic feet, a new record high and up 16% from a year ago.

Technically a gap on the continued spot month chart down to USD 4.035 is in danger of getting filled. This could indicate another 10% drop from current prices on the new front month of November. The USD 4.00 level coincides with 200 day moving average so it will be a good support level.

Gold continues to trade sideways either side of USD 1,000 with sellers emerging on any uptick due to an overhang of speculative long positions. Some disappointment has begun to emerge as investors gets worried that a correction is needed before the next attempt on the 2008 high at USD 1,032.70. Inflation worries have eased further with the forward expectation having dropped to 2.85% from 3.31% back in August (chart below).

Nervousness about the health of stock markets as we head into the Q3 earnings season has not lifted prices and more importantly the risk of a stronger dollar could pull it lower. Technically stay long of Gold above USD 985 but take profits towards USD 1,020 and look for better levels to buy. Keep a close watch on a break below USD 970 as it could signal a deeper and longer correction which would force many to adjust their near term forecasts.

Grain and oil seeds markets continue to watch weather forecasts closely as we enter into the US harvest season. Fears about frost as seen a couple of weeks back is the main factor that could interrupt what is expected to be a record harvest for Soybeans and second largest for Corn. The USDA will update their current yield estimates, production and supply-demand outlooks on October 9.

Corn for December delivery is confined to a USD 300 to USD 350 range with prices having held up despite the record harvest expectations. A break above USD 350 should trigger a move towards the August high at USD 376.

Soybeans for November delivery meanwhile lingers at the bottom of its USD 880 to 1035 range with the record harvest forecast keeping prices under pressure. Look out for a break above USD 940 as it could trigger a move back towards USD 977.

Published on  Fri, Oct 2 2009, 13:53 GMT