Global stock markets continue to rally on the “we think it’s over” hope, especially driven by financials as news about increased earnings for the 1st quarter has emerged. Some scepticism still persists as indicated through the ongoing collapse in global trade and employment which does not bode well for the broader markets.
Crude Oil has spent either side of Easter in a tight range around $50 which has become a bit of a pivot point for now. Buyers are looking for demand to improve taking its cue from the improved sentiment in stock markets, also aided by expectation of supply problems once this current demand slump is over.
We still worry that the recent gains have been built more on sentiment than solid foundation as fundamentals still don’t show any strength. API showed US oil inventories rising to their highest since 1990 as refiners shut units for maintenance and outside OPEC countries increased shipments.
OPEC who currently produces around 40% of global demand has so far achieved an 80% compliance of the record 4.2 million barrels of daily production cuts announced last year. This figure has been stable recently indicating that they are not getting closer to reach their target. During the same period increased production from US, Brazil and Russia has somewhat offset the cuts.
Near term we face a period where we may be struggling to sustain prices at current levels as macro economic data still points towards slowing demand. At the same time we are into the historically low demand months of April and May.
The technical picture still shows WTI Crude for May delivery being stuck in a range between $53.80 which is trend line resistance from December and $47.80 support being 50 days moving average. Given the near term outlook we see main risk being to the downside with a possible move back $45.
Gold has spent the Easter week trying to recover from the sharp sell off that saw Comex Gold for June delivery reach a low of $865 in early April. This mini rally has happened without help from the dollar which has strengthen during the same period and thereby gone against the convention that stronger dollar should mean weaker commodity prices.
The main driver for Gold, with stock markets recovering, seems to be the worry about future inflation due to government stimulus spending becoming an issue sooner rather than later. This is a worry that Saxo Bank do not share at this moment in time.
The dramatic flow of investments into Gold ETFs earlier this year has stopped and reversed with the biggest outflow this week since October. Most headlines are still pointing towards higher prices with one prediction being higher than the other. We have the contrarian view that we are running out of enough good news to sustain a positive stance.
The fear of IMF Gold sale persists but unless the US government agrees this will not happen. At the moment it is not likely that the President Obama will sanction such a request but the threat is currently enough to unnerve the market, especially with India and China pressing for the sale of the whole reserve to raise money for least developed countries.
Technically June Gold has spent Easter in a small uptrend in an overall downtrend and the move lower on Thursday re-established this downtrend and the initial target of $865 has been met with $840 now the next target ahead $805. A daily close above $910 will neutralize this downward move and longs can be re established.
Copper continued its month long rally into Easter and is currently up 56% from the December lows. The gravity defying rally has happened as Chinese buying has forced CTA’s, Hedge Funds and other technical driven operations to join the rally.
The feeling in the market is that the Chinese State Bureau (STB) has been buying Copper and other industrial metals over the last few months in quantities that exceed what would be just rebuilding of stocks. Speculation is that China may have made a strategic decision to stockpile metal as an alternative to foreign bonds.
From an economic cycle point of view it does not make any sense that Copper, which is normally a good economic activity indicator, should sit at the top of the leader board just as most countries are in or heading into recession. It clearly shows that other forces are at play which gives the Chinese story a lot of credibility
Technically High Grade Copper for July delivery spent this week testing 200 day moving average at $225 without breaking through. This combined with a contract that is heavily into overbought territory some further consolidation is expected near term. Look for a possible retracement back towards $195.
