The president of the European Central Bank, Mario Draghi, reacted to the continuing deteriorating outlook for Europe and rise in borrowing costs for some Eurozone countries by saying that the ECB was “ready to do whatever it takes”.
This resembled the now famous Jackson Hole speech by the US Fed’s chairman in 2010, when he signalled the introduction of QE1 later that year. The market took the comment by Mr Draghi as a sign that the ECB will intervene to buy sovereign bonds issued by Spain and Italy, which both have seen borrowing costs reach levels where a bail-out could become necessary.
The euro jumped from a two-year low and the dollar weakness generally helped commodities move higher as well. The chance, however, that this risk-on rally in currency markets turns out to another one of a relative short duration is very high, given the current north/south divide within Europe as to what can and will be done to save the Euro in its current set-up.
In a change from recent weeks, the agriculture sector saw the weakest performance during the past week, as both the grains and soft sub-sectors suffered losses above four percent on the back of profit taking following a dramatic rally recently. US weather forecasters now sees the chance of rain to reach drought-stricken parts of the country but the risk – particularly for corn – is that it is too little too late.
Precious metals were the best performers, not least helped by a weaker dollar, with gold taking the lead after moving above previous levels of resistance at USD 1,610.
Oil markets finding support as geo-political uncertainty persists
The strong rally in oil markets - which was kicked off in late June by geo-political concerns regarding Syria, Iran and most recently Iraq, together with lost supplies from a Norwegian oil strike - seems to have run out of steam as the macroeconomic sentiment continues to deteriorate.
The sanctions against Iran have proved very effective so far and exports from the country with nuclear aspirations have slowed to a trickle, removing an amount equal to what was lost during the Libyan conflict in 2011. The escalating tensions in Syria and worrying signs that it could spill over into Iraq have also unnerved the oil markets. All in all, this leaves the global oil market with less supply at a time of seasonal peak demand, and it has helped the price of Brent crude, the global benchmark for more than 50 percent of physical transactions, to recover almost half of its March to June sell-off.
The rally has primarily been supportive for Brent crude as the tightness from lost Norwegian production and geo-political worries impacts this global benchmark the most. The front month futures spread between WTI and Brent crude has as a consequence widened by USD 5 dollars since the oil prices reached the low point on June 21.
Following the strong rally since mid-June, Brent crude has now settled into a 102 to 108 trading range while trying to decipher which leg to stand on. Geo-political tensions and the chance of renewed quantitative measurements in Europe and potentially the US leaves the market supported despite weak macroeconomic conditions across many different economies.
Economic data from China has improved slightly recently, but at the same time oil imports in June were down 12 percent from May, which could signal that the rush to fill commercial and strategic reserves have begun to slow as they fill up. The building and filling of strategic storage facilities has been a Chinese aspiration, in order to bring its forward cover closer to 90 days which is what OECD nations generally have.
Hot weather supports natural gas - for how long?
The dynamics in the US gas market have changed over the last couple of months as the heat wave across the country have significantly helped to reduce the overhang of natural gas held in underground storage facilities. As the chart shows the current surplus inventory over the five year average have now shrunk from 60 percent in March to just 16 percent today. The demand for gas has been strong enough to push the Aug12/Sep12 futures contract spread into backwardation (August price higher than September) which is a relatively unusual event this time of year but which also reflects the fact that demand for gas has generally been rising as the low prices during the early months of 2012 saw power generators replace coal with gas.
The summer related peak in demand generally occurs within the next couple of weeks and as demand begins to slow, with another few months still to go before winter heating demand begins to exceed injections, storage levels can still climb towards and above the record high of 3,852 billion cubic feet from November 2011 and on that basis further advances much above USD 3 will begin to find some resistance.
Gold back above 1600 - looking for momentum
The yellow metal has taken a small initial step in its attempt to break out of the relatively tight trading range which has prevailed for several months this week.
Spurred on strength against other currencies than the dollar, not least the euro combined with signs of renewed safe-haven interest it broke above previous resistance at 1,610. Whether this will be enough to drive it higher at this stage remains to be seen, as many view the recent dollar weakness as temporary and once the speculative overhang of long dollar positions has been removed renewed headwind from a strengthening dollar will make further advances difficult.
Hedge funds and other large investors are still holding a relatively small net-long gold position while ETP investors have scaled back their holdings from a recent record of 2,413 metric tons to 2,396 currently. The threat by Moody’s, the credit rating agency, might downgrade core European economies should support gold, as there are increasingly few quality investments available to the global investors looking to a safe place to put their cash.
While these all offer some level of support to gold, the main driver for a move higher will be the emergence of momentum in the market, something that has not been seen for months. Whether this require a break above the June high at 1,641 or the 200 day moving average at 1,655 remains to be seen but at least for now gold has a fighting chance of that happening providing 1,600 holds up against any downside selling attempts.
US crops desperate for a drink
The price of key US crops finally succumbed to some selling this week following one of the strongest rallies in recent memory, which resulted in the price of both soybeans and corn reaching new record highs. The selling was triggered by weather forecaster who predicted that some rain would finally hit some of the drought stricken areas of the US Midwest, bringing some temporary relief, and causing some selling by money managers who had been scrambling to build long exposure as prices surged higher. Further dry and hot weather is however expected for next week, and while corn crops in many areas are beyond repair, soybeans could still benefit from rain. This helps to explain why corn has been the relative better performer during the recent setback as the chart below highlights.