The week just gone presented us with two such events, first of all hurricane Sandy which slammed into the US eastern seaboard and left a trail of destruction. The immediate impact on commodity markets was on petrol prices which rose as focus returned to the already existing low levels of supplies around the New York area. The rally however proved short-lived as demand dropped and refineries came through the storm relatively unscathed and ready to restart production.
The week ended on a more positive note in the US after the second event - the jobs report for October. The number of jobs created in October exceeded expectations and sent stocks and the dollar higher but sent gold lower. The focus in commodity markets now switches towards the US election tomorrow with the outcome still quite difficult to predict. Once the election is over the focus of markets will move to concerns about the fiscal cliff which looms large in January and which, unless addressed, could slice a large chunk off US growth and leave it and the rest of world vulnerable to a slowdown.
Against this backdrop, commodity markets experienced mixed fortunes during the week with the DJ UBS commodity index showing a loss for the second week in a row resulting in a flat return during 2012. This is despite the fact that markets should take some comfort from emerging optimism that China and USA, the world’s two biggest economies, according to recent data are showing signs of improving. However uncertainty about the outcome of the US election, the leadership transition in China and renewed worries about Greece’s bailout, together with a stronger US jobs report sent the Euro lower and have so far off-set any good macro-economic data.
Hedge funds defensive: Hedge funds are generally having another “annus horribilis” and with December fast approaching many may be inclined to be defensive and protect potential profits rather than trying to go for glory during the remaining active trading weeks of the year.
Unless clear investment opportunities arise either from a change in macro-economic data or some geopolitical event we suspect that the industrial metal and energy sectors will struggle to perform during the remainder of the year.
While this risk-off continues we could see some additional weakness across the grain sector which has been the star performer this year but the fact remains that low levels of global stocks of key products, such as soybeans and corn, together with supply disruptions from key wheat exporting nations should ensure elevated prices during the winter months.
Gold in corrective mode: The precious metals sector continues to look for support as the improved economic outlook for the US and Chinese economies has rattled speculators and triggered a much overdue spate of long liquidation. The better than expected US jobs report triggered additional selling with gold falling to a seven week low below $1,700 after resistance at $1,730 was rejected earlier in the week.
The technical levels to look out for remain the same with critical support located in the $1,660 to $1,665 area as two important technical indicators meet in this area. Resistance can be found at $1,730.
Brent crude lower: As we suggested back in September we saw the potential for Brent crude settling into a $105 to $110 range for the remainder of 2012. So far this looks possible as weak economic fundamentals combined with a time of seasonally lower demand will help off-set geopolitical worries which are never far away and keep the market range-bound.
Resistance has been established at $110.50 per barrel while support made from the lows seen during the two most recent attempts to the downside can be found towards the before mentioned $105 level with a potential overshot down to $103.20, the 50 percent retracement of the June to September rally.
Sandy’s effect on refineries: Sandy was primarily a story about petrol as the shutdown of most of the refinery capacity in the affected area triggered a rally due to concerns about a further reduction in the already low inventory levels of petrol and diesel in North East USA.
A combination of limited damage to the refineries but also serious problems in getting them back online due to power outages has left a limited amount of petrol available for consumers, thereby reducing demand and the price.
Risk adversity sees grain lower: Grain markets continue to be well supported despite the negative sentiment in energy and metals. While this risk-off continues we could see some additional weakness in grain prices but the fact remains that a low level of global stocks of key products such as soybeans and corn, together with supply disruptions from key wheat exporting nations, should ensure elevated prices during the winter months.
Soil conditions following the drought in Russia, Ukraine and the USA will determine the market’s outlook for production during the next season. Currently, forward prices are lower on both corn and soybeans but remain high on wheat.
The fundamental story which has been supporting the grain sector these past few months continues to limit losses as high prices are expected to stay with us, at least over the next few months until we approach the new season.
The Peninsula
