Members login
Tame Trading for Crude and Gold Underlined by Low Volume
Written by article default Tuesday, 12 October 2010 08:24
North American Commodity UpdateCommodities - Energy
Oil Falls Back into its Range as Trading Volume Drops by Nearly Two Thirds of Friday’s Turnover
Crude Oil (LS Nymex) - $82.21 // -$0.45 // -0.54%
Overall price action on the active crude futures contract was tame Monday as traders found little guidance in the form of fundamental catalysts or underlying risk appetite trends. For price action, the benchmark energy asset its third decline in six sessions. Notably, this market has not seen a back-to-back decline since the four consecutive, daily declines through September the 17th. This is a natural reflection of the buoyancy that is still retained by this market even if it struggles to put in for new highs. Congestion is now seen between $84.40 and $80.50 as speculators and investors alike look for a particular catalyst to spur the effort to expand or unwind exposure on a wholesale basis.
Looking for the fundamental driver for the opening session for the week, there were no major macroeconomic events scheduled for release; and the bite of underlying risk appetite was notably absent. As a measure of investor sentiment, we note that while the S&P 500 would put in for a new five-month high close through the end of the US session, the range on the trading day was among the smallest seen in months. For potential catalysts to jump start speculative interests, we could see a notable response to the start of the third quarter earnings session. This week brings the first round of notable releases with blue chips Intel, Google and General Electric along with larger financial player JPMorgan. These figures could define rouse risk appetite trends which have otherwise taken a backseat to stimulus concerns recently. Speaking of stimulus, Fed policy officials would do little to redefine the potential for extending assistance to the capital markets and economy in a round of commentary today. Member Dudley maintained his dovish standing while Hoenig kept his hawkish stance. Vice Chairman Yellen did delivery something of a surprise, however, when she noted the risk with keeping rates exceptionally low for an extended period – a meaningful note from someone that is considered by many to be the most dovish member on the board. Looking ahead to Tuesday’s trading session, the scheduled event risk will fill out a little bit; but there is a notable glut of high-level event risk. Japanese household confidence, UK trade and US small business confidence figures are all meaningful but ultimately lacking for their ability to stoke volatility. What may be interesting though is the FOMC minutes. While there aren’t many surprises expected from the review, it is a general overview of policy and economic forecasts – boiling down our expectations for the US.
For trading activity, the most remarkable shift is the drop in volume on the futures market. The November contract saw a 71 percent drop in turnover; but some may write that off as an early rollover to the next contract as expiration approaches. Yet, turnover on the December contract would also drop 64 percent (to 225,125 contracts). We should remember also that net speculative interest in the COT data last week reported a 44 percent surge to the highest net long level since April 23rd.
Crude Futures Chart (Daily)
Commodities - Metals
Gold Makes a Fresh Record High Close but the Market’s Activity Level Far from Remarkable
Spot Gold - $1,354.05 // $7.31 // 0.54%
Gold may have closed at a record high on Monday; but the move was far from encouraging. Looking at the market from an intraday basis, we see that the sessions advance would fall well short of Thursday’s swing high (a session that was also notably the biggest sell off since the late-July exhaustion decline that preceded the current bull trend). From the turnover in futures and the SPDR Gold Trust volume levels, along with the drop in ETF holdings of the precious metal, we can tell that today’s advance would struggle to rally speculators and longer-term investors to bid the gold to untold levels. On the other hand, with risk appetite catalysts lining up through the coming days and speculation surrounding stimulus flows picking up, this anchor on activity may not last for long.
For those trading gold commodities and ETFs, there were major potential drivers for price action: policy officials reaching some agreement on FX intervention and renewed interest in the Fed’s debate over whether they should expand the size of their stimulus program or not. As for the effort to sideline a potential protectionist standoff between active currency intervention and manipulating currency flows with monetary policy, the use of these efforts (good or bad) are too deeply engrained in economic and fiscal performance for the various authorities to come to an agreement overnight. Few were expecting a remarkable shift in the G20 members’ discussions over the weekend; so the lack of progress proved unremarkable. The speculation surrounding the possibility of stimulus expansion on the Fed’s part was a little more interesting. Despite the lack of a response, there was a perceptible shift in the group’s bearing today. Whereas Fed member Dudley maintained his dovish bearing and Hoenig his hawkish approach; the typically liberal (in a policy sense) and newly elected Vice Chairwoman Janet Yellen noted a concern with the potential consequences of keeping rate low for an extended period. From someone that is considered to be one of the most dovish members on the board, this is a remarkable enough highlight. Tomorrow, we will see more stimulus rumination with the FOMC Minutes, ECB President Trichet’s discussion on his economic outlook and the BoE’s David Miles’ remarks on the UK economy.
Data aside, the most remarkable development on the day was the drop in trading activity levels. The active December futures contract would report a 71 percent drop in turnover from Friday’s volume reading to a 102,609 contract movement. It is also worth noting that ETF holdings of the precious metal dropped 0.1 percent to its lowest level since September 16th (at 66.99 million ounces) and the difference between the active and two-year deferred futures contract was just off its lowest level in recent history.
Spot Silver - $23.29 // $0.04 // 0.17%
It has been the case in recent weeks that silver has borrowed from risk appetite trends and its gold correlation equally as it suits the metal’s bullish drive. However, the commodity’s performance on Monday was as lackluster the Dow or S&P 500. The 30-year highs on both an intraday and close basis can be traced back to the 69 percent drop in the December futures contract’s volume levels. At 125,460 contracts, the market is as quiet as it has been since last Monday when congestion had taken over.
Spot Gold Chart (Daily)
Click here to learn more about DailyFX.