Commodities under pressure as Dollar hit two-month high
Commodities have faced one of the worst weeks in 2016 especially gold prices as we have seen the yellow metal falling to fresh four month low on speculation that the case for an interest rate hike by the end of this year has strengthened.
The Dollar index rallied to two month high putting more pressure on safe haven assets. In this report, we review the technical outlook of the major metal commodities and metals ahead of next week trading.
Gold
The Yellow metal plunged during last week after breaking below 1300 psychological support, which cleared the path for a re-test of 1250 weekly support.
Prices ended the week on a very negative note as shown in the weekly candle close. And by now, another extension lower is likely in the coming days as the near-term trend turned bearish.
Looking at the wave sequence, gold has a potential target around $1210 per ounce, however a move back towards 1276/1285 resistance zone cannot be ruled in the beginning of next week especially if the U.S Dollar begin to correct some its latest advance.Meanwhile, we don’t expect prices to break above the mentioned above barrier as the upside potential remain limited for the time being.
Prices have found a major top for this year at 1375 level and should retrace at least 50% of the entire recovery seen from 1045 low, which can send prices to the 1210 area highlighted previously.
In the near-term, 1242 level represent a strong support followed by 1232 level. In the opposite, prices should remain under pressure as far as 1276 peak is in place.
Silver
Silver is following the same structure as Gold, however we can see that the grey metal is weaker than the yellow metal as prices have already reached the 50% retracement of 2016 low which stands at $13.65 level. The weekly close was very significant as prices showed a strong bearish engulfing candle, reinforcing the negative outlook in the short-term.
In addition, Silver broke below its 20 weekly simple moving average and is now heading towards its 50 moving average which coincide with the 61.8% of the recovery mentioned above, this level is located at $16.55 per ounce and can provide a strong support to prices in order to stop the current sell-off.
In the opposite, any bounce should be limited below 18.00 barrier which turned as a bearish pivot in the hourly chart.
Oil (WTI)
Oil prices turned bullish in the hourly chart as the recent OPEC deal helped prices to start a new impulsive wave in the direction of $51 weekly resistance.
Looking at the technical picture, Oil is showing an inverted head and shoulders reversal pattern in the weekly chart with the neckline located at 51.70 area. Therefore, we expect prices to find strong resistance in the coming days as bears may try to protect this major resistance.
In the meantime, the expected corrective move to the downside should find buyers around 48.70/48.20 area if prices manage to get there.
To conclude, Oil prices remain bullish in the short-term, however the med-term trend still negative below 51.90 peak and only a weekly close above this level should confirm that prices have found a major bottom for this year and the inverted head and shoulders pattern will be ready to open the path for a major rally in Oil prices.
Dollar index
The U.S Dollar traded strongly higher during last week across the board, boosted by expectations for rate increase in 2016.
The Greenback managed to overtake 96.25 hourly resistance, which triggered a strong rally that found a top around 97.20 as the Non-Farm payrolls came out softer than expected.
For the time being, prices are targeting 97.60 peak, therefore any downside wave should be considered as corrective only and we should new buyers around 96.25/96.00 zone during the week ahead as the former resistance levels are likely to turn into supports in the coming days.
This scenario of strength in USD should weigh on commodities which reinforces the views given above.
Oil has stormed back up the charts after the recent OPEC meeting has yielded some fruit, albeit limited for the time being. So far Iraq has agreed to limit its oil production at around 4.75M - 5.0M barrels per day, which is the first OPEC concession to actually limit supply that we have seen in a long time. I'm myself a sceptic at times of OPEC but it would seem that they have finally managed to make headwind on the subject of oil prices and it will be interesting to see if others follow suit. The market reaction has of course been positive at this new, and this no doubt surprising given that oversupply fears had been one of the major problems for the oil sector and bullish traders in general. This comes on top of a day where even Saudi Arabia and Russia have said that they will both look to limit oil production in an effort to boost prices and bring about stability in the market. However, Russia is a hard one to follow and it will be interesting to see if they will a) stick to an agreement and b) want more concessions from others before even considering it in the first place. The more likely scenario is them freezing output near 11 million barrels a day - a near record high.
The technical's on the chart are very strong however, and the bulls are looking to get back in control especially with the fundamentals being so strong as of late. It's now not unthinkable to even consider oil being around the $60 barrel mark come year end. The recent push has so far touched on resistance at 51.53 before slipping back, however with the bulls looking to take control I wouldn't expect to see this level hold, especially if OPEC gets its way. The next major level up would be at 54.09 with the most major level likely to be found at 60.28, and the level I would struggle to see markets push past this year unless there were very major concessions which seems unlikely with Russia and the majority of non-OPEC nations.
Regardless of the oil all commodities have been bouncing around the charts lately, none more so the silver which fell sharply before recovering on the back of the weaker than anticipated non-farm payroll on Friday. It has so far managed to climb back up the charts and is looking a little worse for wear, failing to even break through the 200 day moving average today. While we did see a double bottom scenario at 17.133 it's likely it will struggle to hold further momentum unless we see further weakness in the US dollar, or alternatively the global economy struggling. Regardless of this the bears are looking to take a quick swipe back at silver and the recent profit taking will do little to deter them at the end of the day.
Appetite to risk boosted by higher oil prices, is $60 a short term target?
Most Asian stocks traded higher on Tuesday with a strong lead from U.S. equities, a weaker Yen, and higher oil prices.
Russia’s willingness to join OPEC in stabilising prices pushed oil 3% higher on Monday, after President Vladimir Putin said that Russia, the world’s biggest oil producer, was ready to co-operate to limit oil production. Now with the market share war coming closer to an end, we can say that the worst for oil is behind us, but comments from Saudi’s Minister of Energy and Chairman of Aramco Khalid Al-Falih that prices could rise to $60 a barrel seems a bit optimistic at the current stage.
Markets are already pricing in a potential deal to cut output, and prices have risen by more than 15% since OPEC members met in Algeria on September 28. I do believe that an official agreement will be reached when the cartel meets by the end of November, but the key questions to be asked thereafter are to what extent will they adhere to the new set quotas? What if the prisoner’s dilemma comes into play? How fast will Nigeria’s and Libya’s supplies return? And what does $50 a barrel mean to the shale oil industry?
Overall, I am optimistic that we’re getting closer to a rebalanced oil market, but as always markets do overreact to rumours which suggest that any upside should be limited from current levels.
The U.S. dollar resumed its Monday’s rally with the index back above 97 despite no data being released. However, traders seem more convinced that a December rate hike is coming with U.S. 10-year treasury yields climbing above 1.76% and CME’s FedWatch showing expectation for December rate hike standing at 70%. Meanwhile the pound came under renewed pressures, extending its drop for the fourth straight session as traders continued to ignore the positive flow of economic data and focused on the price that U.K. has to pay for a hard Brexit.
In the commodity currencies space the Kiwi dropped by 1% to a 3-month low of 0.7062 as RBNZ’s John Mc Dermott made it bluntly clear that further monetary policy easing is on the way. Inflation remains to be the key indicator frightening central bankers and with New Zealand’s CPI just slightly above zero in third quarter, more should be done to reach the 1-3% inflation target.
By Hussein Sayed, Chief Market Strategist (Gulf & MENA)
Commodity currencies feel the pain of a strong USD
The dollar has taken centre stage today, as commodity currencies and many major pairs saw sharp dips against the USD as it strengthened rapidly during the American trading session. The GBP, EUR, CAD, NZD and AUD saw very large drops against the USD and so far it seems that the storm may not be over. All of this has been set off by the never ending prospect of a US rate hike which seems more and more likely come the month of December. Many are expecting that the USD could rise even further by the end of the week as Yellen is set to speak on the economy after retail sales data is released and consumer sentiment. The US economy has always been consumer driven so this will certainly add a lot of weight behind her plans and I would expect her to remain very hawkish with such a strong labour market at present.
For the commodity currencies it has come at a time of weakness for a lot of them, despite the fixed interest trading opportunities they have provided thus far. The NZDUSD in particular saw sharp drops and this is no surprise given that the NZ economy has been languishing as of late, with global dairy results down in the last round of auctions and the Reserve Bank of New Zealand being vocal about the high NZD and the effect it will have on the economy.
So far the NZDUSD has crashed through the 50, 100 and now the 200 day moving average, which points to some very bearish signals on the charts. As a result traders will be looking at the next level downs if it can push through the psychological 70 cent level which is always a barrier. Support below this key level can be found at 0.6994, 0.6948 and 0.6888 with the last level likely to be a major level that will be hard for traders to push through. Something to add further consideration to this all is the upcoming food price index m/m which gives an indication of inflation figures for the NZ economy. I would like at this as a guide for future RBNZ movements at this time as they look for a signal to cut rates further to a) help fight deflation and b) stimulate the economy as it struggled to find momentum back into its current previous form.
Across the globe the USDCAD has also been jumping sharply on the charts, and this has been a surprise given the recent advances in oil as well - something that has a very strong correlation normally to the CAD. However resistance at 1.3275 continues to be a barrier for advances and unless we see the USD pick up the pace against commodity currencies it could be some time until that level is broken. Also the upcoming OPEC meeting is likely to add weight to jumps in oil prices which could in turn see it swing down and support levels at 1.3149 would likely be the next target.
Tuesday could be unofficially declared as the seller’s market across the financial arena with major equities and currencies all encountering heavy selling momentum during trading on Tuesday. The only asset class that seemed to benefit was the Dollar, which has lurched to seven-month highs, while major equities declined into the red and the GBPUSD plunging to levels not seen in a generation.
Away from the Pound headlines, Gold has entered the month of October appearing depressed with the yellow metal suddenly falling to a four-month low below $1245 after unexpectedly crashing through the psychological $1300 support at the beginning of the month. Selling momentum has definitely intensified in recent days across metal trading on speculations that the case for a US interest rise before the end of 2016 has strengthened. The Dollar Index is currently trading at its highest level in around seven months which is subsequently putting further pressure on safe-haven assets while weighing on equities and global currencies.
Speaking of equities, most were painted in red on Tuesday as oil price volatility and anxiety ahead of Wednesday’s Fed minutes repelled investors from riskier assets. Asian stocks have already commenced Wednesday on a shaky footing amid risk aversion and this bearish contagion could infect European markets later today. Wall Street was swift to relinquishing gains following the disappointing corporate earnings with further losses expected as slumping crude prices and mounting rate hike hopes sour risk appetite.
Fed minutes in focus
Dollar bulls have been dominant in October with the Greenback suppressing other currencies as expectations mount over the Federal Reserve raising US interest rates in December. Lasts week’s mixed jobs reports have been accepted by the markets as part of the attributes which provide a compelling reason for a US interest rate increase before year-end. The Dollar Index currently trades around seven-month highs and could edge higher as optimism rises over the Fed taking action.
Investors may pay very close attention to the latest FOMC meeting minutes on Wednesday evening with participants around the globe seeking direction on the future pace of US interest rate rises. The pending Fed minutes could be a market shaker considering the growing divergence of opinions for interest rate hikes. Much focus may be placed on the three dissents with investors searching for clues on the depth of the hawkish rebel camp and where the Fed sentiment stands.
If the latest minutes have a hawkish feel then the Dollar Index which is already technical bullish could edge higher with prices trading towards 98.00. From a technical standpoint, previous resistance at 97.50 could transform into a dynamic support which encourages a further incline towards 98.00.
Sterling still pressured
The mounting hard Brexit fears continue to grip the Sterling with sellers attacking incessantly at any given opportunity. Sterling has recorded its worst four-day performance since the Brexit vote with the GBPUSD sinking towards 1.21 on Tuesday and further declines could be expected in the future as confidence wanes over the post-Brexit UK economic outlook. It is becoming quite clear that the flash crash last week Thursday has left a damaging impact on the Sterling with weakness becoming a dominant theme as buying sentiment towards the currency diminishes.
The GBPUSD remains heavily bearish on the daily timeframe with steeper losses expected as expectations heighten over the Federal Reserve raising US rates in December. A decisive break down below 1.2200 could open a path towards 1.2000.
Sterling attempts to find stability – but for how long?
It has been another dramatic 24 hours for the British Sterling with the currency hitting the floor once again during trading yesterday in what looked like a continuation of the phenomenal fall from the “flash crash”, before the Sterling found stability and regained some ground overnight following the news that Prime Minister Theresa May will hold a “full and transparent debate” with UK Parliament on the Brexit strategy. When you consider that there will be a high percentage of the UK Parliament that will be strongly against leaving the European Union this has provided the opportunity of stability for the Pound after a dramatic couple of days.
While the Pound has found stability since the news of a parliamentary debate on the Brexit strategy, many are still going to ask the question for how long can the currency remain stable. The problem with the flash crash from last week is that such a dramatic decline in the Pound would have eliminated many buyers and consequently encouraged investors to heavily think twice before considering buying the currency in dips. The market in general remains heavily short and the tense comments from both the UK Prime Minister and her EU counterparts on tough negotiations last week have made investors incredibly nervous.
The buying sentiment towards the Pound is still at extraordinarily low levels and it will likely remain this way if the concerns that a “hard brexit” will have severe consequences on a services-led economy and threaten access to the single market of the EU. Members of the UK parliament who are strongly against exiting the European Union are going to have to win the debate and push plans against rushing on EU negotiations, which would mean Theresa May would be under pressure to back down on such a strong approach and this would then reduce the immediate market fears about what is possible to come ahead.
Unless there are reassurances provided that the UK can retain single market status, sellers will remain in the driving seat with the Pound remaining at its weakest level in a generation.
By Jameel Ahmad, VP of Corporate Development & Chief Market Analyst
Equities dragged by disappointing Chinese data; U.S. dollar bulls on a short break
A 10% fall in Chinese exports in September does not only provide a warning signal that the world’s second largest economy is losing momentum, but also suggests a fragile global demand, specifically from developed economies which comes in line with the World Trade Organization’s outlook that global trade growth is slowing. Imports also dropped by 1.9% versus expectation of a 1% rise, indicating that demand for key commodities that played a role in the housing boom is also slowing.
The released data reflected negatively on Asian equities, and supported the safe haven Yen after it declined to its lowest levels in two and half months against the dollar. USDJPY fell by more than 100 pips from its highs to trade at 103.56.
Oil prices came under pressure, falling for a third straight day after API data showed crude inventories rose by 2.7 million barrels last week. This is the first fall in U.S. stockpiles in 6 weeks and official data due later today from EIA might show a similar pattern after more than 25 million barrels were withdrawn in the past 5 weeks.
The 15% rally in Brent from June 28 to Oct 10 was mainly driven by headlines from OPEC and non-OPEC producers showing their willingness to end the supply glut, and we need to see this continue for Brent to hold the $50 benchmark especially when OPEC’s official meeting in Vienna is more than 6 weeks away from now.
The dollar index declined slightly from a 7-month high as bulls seem to be on a short break. Yesterday’s Fed Minutes provided very little information beyond what we already know, and markets continued to price in a 70% chance that the Fed will hike in December. The resilience in financial markets shows just how effective U.S. policy makers were in communicating their thoughts. I believe that spreads between U.S. treasury yields and those of other major sovereign bonds will be a key indication on how the dollar will perform, if spreads continue to widen the dollar index could be heading towards 100 by year end.
The pound was the best performing currency yesterday after UK’s Prime Minister Theresa May, has agreed to consult with the Parliament over Brexit negotiations. Her comments that their negotiations will include maximum possible access to the European market is making the hard Brexit case look softer, but we still see many bumps ahead and prefer selling the rallies than buying the dips.
By Hussein Sayed, Chief Market Strategist (Gulf & MENA)
Dollar bullish investors were on the offensive on Wednesday as September’s hawkish FOMC meeting minutes reinforced expectations over a US interest rate rise before year-end. Market participants were provided some clarity after the minutes showed September’s inaction being a “close call” with several members even agreeing that the Fed should raise rates in the near term if US data continued to strengthen. Bullish investors warmly welcomed the hawkish bias with the Dollar Index lurching towards 98.00 as optimism rose towards the central bank breaking its tradition of caution this year. With US domestic data repeatedly displaying signs of stability and inflation slowing treading towards the golden 2% target, there seems to be a justifiable and compelling reason for the Fed to pull the trigger in the coming months.
A key talking point from September’s Fed minutes was the growing divergence within the committee, as several officials warned about the potential costs of keeping rates unchanged for prolonged periods. Although the overall market reaction was somewhat muted, the minutes have displayed the Federal Reserve’s intentions to raise US rates this year, consequently providing the markets a cushion for the shock beforehand.
Sterling on a chaotic ride
Sterling was flung onto a chaotic rollercoaster ride this week with prices violently swinging between losses and gains as the explosive combination of hard Brexit jitters, political uncertainty, and a resurgent Dollar left investors on edge. Surprisingly the Brexit-gripped pound was the best performing currency on Wednesday following UK’s Prime Minister Theresa May’s agreement to hold a Parliamentary debate on the strategy for the Brexit negotiations. It is becoming increasingly clear that the Brexit anxieties have left the Sterling extremely sensitive and this was displayed on Wednesday when the GBPUSD spiked up over 200 pips. Regardless of these short-term gains, the Pound remains heavily depressed with steeper losses expected as the Brexit jitters haunt investor attraction towards the currency.
Sterling/Dollar remains fundamentally bearish with prices potentially trading closer to the parity dream as the toxic mixture of hard Brexit fears and renewed Fed hike hopes entices sellers to attack incessantly. From a technical standpoint, the breakdown below 1.2200 could trigger a further selloff towards 1.2000.
WTI under pressure again
WTI Oil stumbled towards $49.50 on Wednesday after the Organization of the Petroleum Exporting Countries (OPEC) reported its oil production hitting an eight-year high in September consequently rekindling concerns over the excessive oversupply. The downwards move was complimented with uncertainty over Russia’s willingness to trim production following comments from Rosneft boss Igor Sechin over how his company will not cap oil production as part of the potential OPEC freeze deal. OPEC and Russia have talked a big game on the potential freeze deal and could pay heavy prices if investors are left disappointed once again.
Although the recent surges in oil have been impressive, sentiment towards the commodity remains bearish with further declines expected as the oversupply fears haunt investor attraction. Attention may be directed towards Thursday’s crude oil inventories report which could send oil lower if there is a build-up in inventories.
Commodity spotlight – Gold
Gold has hovered above four-month lows at $1257 this week as expectations mount over the Federal Reserve raising US interest rates before year-end. This zero yielding metal could be vulnerable to further losses as the combination of Dollar strength and rising Fed speculations create a foundation for bears to install repeated rounds of selling. Wednesday’s hawkish Fed minutes may have cushioned the markets for a pending rate hike and such could translate to downside risks for Gold. From a technical standpoint, a decisive break down below $1255 could trigger a selloff towards $1240.
A wave of risk aversion enveloped the global markets on Thursday following the sharp decline in China’s exports which rekindled concerns over the health of the world’s second largest economy. Stock markets were vulnerable to losses after the trade data with most major arena’s struggling to maintain gains as uncertainty encouraged investors to scatter away from riskier assets. European stocks descended to two-month lows on Thursday dragged by mining stocks while Wall Street was pressured by risk aversion and China fears. Asian shares received a lifeline on Friday, partially erasing previous losses following China’s firm inflation data for September which countered the ongoing fears over the health of its economy.
Global stocks have repeatedly displayed instances of extreme sensitivity with shares violently swinging between losses and gains as oil price volatility, fears over the global economy and uncertainty leave investors on edge. The stock market rally which gripped the headlines this year continues to display signs of exhaustion with the ingredients of a bear market ripening by the day. Investors should keep diligent as it could take an unexpected event to trigger a market-shaking selloff.
China in the limelight
Sentiment towards the Chinese economy was dealt a heavy blow on Thursday following the dismal trade data for September which ignited fears over a slowdown in economic recovery. Exports fell 10% far worse than expected while imports unexpectedly shrank consequently sparking discussions over if the world’s second largest economy could maintain its current growth. The weak trade figures triggered a sense of unease across the markets on Thursday and also renewed concerns over China’s pending third quarter GDP report.
Global markets received a pleasant surprise during early trading on Friday following the sharp rise in China’s inflation for September which somewhat countered the anxiety from the dismal trade data. Consumer prices lurched to 1.9% y/y in September suggesting that consumer demand was gaining momentum in China which is supportive of GDP growth. With the developments in China gripping the global economy, there could be an increasing focus on China data as the nation transitions away from manufacturing towards services.
Dollar bulls maintain dominance
A firm Dollar has dominated the financial markets this week with most currencies bowing to the greenback as expectations mount over the Federal Reserve raising US interest rates before year-end. Domestic data from the States continues to display signs of stability while September’s hawkish Fed minutes have installed the Dollar bulls with ample inspiration. The subtle signs have made it increasingly clear that the Federal Reserve may be preparing markets for an imminent hike this year which should keep the Dollar buoyed.
Investors may direct their attention towards Friday’s retail sales data that may provide some clarity on the strength of consumption. A firm retail sales report for September should reinforce expectations over a US interest rate rise in December.
Sterling bears unleashed
Sterling was extremely pressured this week as the hard Brexit fears encouraged bears to install repeated rounds of selling across the board. The horrible combination of ongoing Brexit anxieties, political uncertainty and strengthening Dollar has left the GBPUSD in a miserable state.
There have been talks of a High Court hearing on a bid to give MP’s a voice over the pending Brexit but this could splash out further uncertainty consequently leaving Sterling vulnerable to further losses. Sentiment remains firmly bearish towards the Pound and this stalling before the Brexit could only last so long before sellers send prices much lower.
The GBPUSD is heavily bearish on the daily timeframe and a weekly close below 1.2200 could encourage a further decline towards 1.2000.
This Week: U.S. Earnings, ECB meeting, Chinese GDP and final presidential debate
Asian shares reversed early gains on Monday while the greenback held steady at its highest levels in seven months in what seemed to be a slow start for a busy week
U.S. equities received a boost on Friday after three major banks reported earnings that beat Wall street estimates, offsetting a profit miss from Alcoa that rattled markets earlier in the week, but concerns over central banks policies, global growth prospects, Brexit aftermath, and U.S. elections kept investors on guard. This week those concerns will be elevated leading to more volatility in financial markets as investors try to navigate through these complexities.
81 S&P 500 companies to announce earnings
So far 76% of the 34 companies that reported earnings managed to beat profit expectations and if this trend continued we’re very likely to see corporate America ending five consecutive quarters of profit recession. This might sound optimistic and probably provide a leg higher to stocks as doubts over high current valuations will be less of a concern, but Q4 earning guidance should be the key on whether to reconsider these thoughts. The dollar index has rallied by 2.5% since H2 and multinational companies’ sales will see their margins squeezed when converted back to dollars, which will raise many concerns over the dollar strength.
Markets want an explanation from ECB
Tapering has become one of the most hated words amongst investors, and markets want reassurance that the European Central Bank isn’t considering this option any time soon after unofficial reports said policymakers at the central bank were considering winding back their asset purchase program. In fact, current conditions require an extension to the QE program that ends in March 2017 to avoid any unwanted shocks to an economy that continues to face sluggish growth and stubbornly low inflation.
I don’t expect any monetary policy changes on Thursday and believe that Mario Draghi will reiterate that ECB is ready to do whatever it takes to preserve the euro. However, an extension of the current asset purchase program could be announced in Decembers meeting after the staff release their new projections.
China’s Growth
After reporting a 10% fall in exports in September which triggered a global equities selloff last week, China will provide a snapshot on how the economy fared in Q3. Nobody wants a weak China at the moment, as this would send warning signals to global markets, especially that debt has come to be one of the biggest challenges facing the second largest economy. With China’s current debt to GDP standing at 249% according to BIS, a slowdown in economic growth has a potential to spark a banking crisis and a prolonged period of weak growth. Markets are forecasting a 6.7% growth in GDP in Q3, unchanged from previous quarter.
Trumps’ final chance!
Drug tests are no more limited to Athletes, and U.S. presidential nominees should go through the process prior to debates, at least according to Mr. Trump. With almost three weeks to the U.S. presidential election, the Republican nominee wants to use all his weapons to gain ground on Clinton after losing many of his party’s supporters due to claims of sexual assaults. With nothing to lose, Donald Trump is likely to go all in Las Vegas on Wednesday, so expect the unexpected.
By Hussein Sayed, Chief Market Strategist (Gulf & MENA)
