China once again showed its importance as another attempt to rein in lending led to selling of commodities and a switch to the perceived safety of government bonds and the dollar. Commodity prices fell to their lowest levels this year as China took fresh measures to cool its galloping growth.
Banks were temporarily told to halt lending in an attempt to reduce the frantic levels of activity during the first few weeks of 2010. Given Chinas and other emerging economies importance in driving commodity prices this move had an adverse impact on markets from oil to metals.
The CRB commodity index which one week into January trading showed a gain of 4 percent have since then been struggling and this week moved back to levels last seen in December 2009 and thereby putting a lot of new established long positions under pressure. Technically the uptrend since March 2009 is in danger of being broken so the next few days will be very important in deciding the near term direction of commodities.
Another piece of bad news has been the renewed strength of the dollar, especially against the Euro, which fell to a five month low this week over continued concerns about Greece’s fiscal problems. The speculative positions recently have heavily been favouring a weaker dollar and this turnaround has forced a lot of selling in order to limit losses.
Stock markets could be the next focus point as Presidents Obama’s proposed overhaul of the banking sector saw equity markets falling through previous support levels. Five failed attempts to crack the USD 1,150 resistance level on the S&P 500 index was followed by a drop through previous support at USD 1,130. This has now opening up for a potential move back towards USD 1,085.
Crude oil for March delivery reached a low at USD 75.6, a 10.50% drop from the recent highs. On top of the factors already mentioned the speculative long position in crude had reached a new record high leaving the market exposed to stop loss selling while OPECs compliance in adhering to agreed production cuts continue to slip.
Adding all these up energy prices had to come lower but considering the amount of unfriendly news prices have held up pretty well. Continued range trading around USD 80 seems to be the most likely trading pattern going forward. For now though it is pretty clear that commodity markets are not ready to decouple from the dollar and the moves there has to be watched closely.
Technically near month crude is in a wide USD 73 to USD 88 upward sloping channel and the month long uptrend is still intact. Additional support can be found at USD 75.25 being the 100 day moving average while resistance is located at USD 77.80 followed by USD 80.70.
Platinum raced to a 12 percent gain this week before selling drove it lower from overbought levels. The dramatic rise seen so far has been due to the January 8 successful launch of a Platinum ETF. To keep up with demand this fund bought 195,000 ounces of platinum during a ten day period, more than 10 times daily global production. Platinum is primarily used in jewellery and catalytic converters in autos and China has again been mentioned as a reason for buying it given the forecast for 17.2 million new cars on the road this year. Look for support on the April contract at USD 1,515 to hold for now.
The gold market also got caught by the resurgence of the dollar dropping back towards the December lows at USD 1,075. Support was found at 100 day moving average at USD 1,086 ahead of USD 1,075 and the crucial trend line support at USD 1,060. The bull market for gold is still intact and the fundamental factors that have been driving gold are still there but for now the dollar is in the driving seat so we have to advise caution on gold for the next few weeks. Relative value trades like gold/silver or gold/platinum ratio trades should perform pretty well during this correction
