A sense of calm has descended on world financial markets, most noticeable stock markets where volatility on the S&P index has dropped to a two year low.
During May of 2008 the S&P index reached a high of USD 1,440 which was followed by a major sell off in the months that followed
The VIX (volatility index) is a measure of fear for the unknown. During periods of market turmoil, the VIX spikes higher reflecting the increased cost of insuring (buying put options) against further losses. During bullish periods like the one we have had for several months now there is less fear and less need for buying insurance. Looking at recent history we have often seen that a VIX reading below 20%, currently 16.50%, has been followed by a major sell off shortly after.
This complacency is worth keeping in mind as we head towards the second quarter of 2010. With the economic outlook continuing to brighten there are only a few clouds on the horizon. The ongoing uncertainty about Greece’s sovereign debt problems and the potential risk of it spreading to other countries, risk about a bubble emerging in the Chinese economy and speculation about how the markets will react to the first round of Central Bank tightening when it occurs.
Against this background the major commodity markets have been trading calmly with an unchanged to higher bias. Crude Oil has been grinding higher over the past couple of weeks, reaching USD 83 which ahead of the important USD 85 level has been difficult to breach. OPEC decided to stick to their agreed production cuts and expressed satisfaction about current levels and also indicated that demand from OECD had begun to improve albeit at a slow pace.
Short term momentum can potentially carry prices higher but that will increase the risk of the market running ahead of itself and a sell off could be the result. The speculative long positions as measured by number of open futures contracts on NYMEX has once again moved back above 110,000 lots after reaching a low of 42,000 lots during the February sell off. In early January, when the winter rally was at its peak, the speculative long position reached a record 135,000 lots which was subsequently followed by a USD 15 sell off in prices.
Technically a break above the recent high will target USD 85.60 with a potential extension to USD 90 which is 50% retracement of the 2008 sell off from USD 147 to USD 33. Support can be found at USD 79 and USD 77.50.
The price of natural gas continues to fall out of bed reaching a five month low at USD 4 after having fallen by a third since the peak of the winter. The slower than expected draw of inventories this past few weeks has left the surplus 4.7 percent higher than the five year average. The market is facing weak fundamentals with increased production due to higher rig count and better efficiency. Companies are finding cheaper ways to produce and new areas to produce in.
Forecast for milder than normal weather in the coming weeks indicates that the U.S. will end the winter with plentiful stocks and the rebuilding of stockpiles will begin from a higher level than normal. The front month of April natural gas on NYMEX is near term primarily only supported by a much oversold RSI which indicates a bounce is imminent. How quickly that bounce will be met by new selling is currently the big question with major resistance now at USD 4.60.
Gold has spent the past few weeks consolidating above USD 1,100 but at the same time has failed to make any attempt on the recent highs at USD 1,145. The speculative long position on COMEX has begun to climb again reaching 21 million ounces with the December 2009 record of 26 million getting closer. We continue to watch the dollar for clues about the next move and are looking for the above mentioned range to hold.
Moody’s investor service this week said that the U.S. and the U.K. have moved closer to losing their AAA credit ratings. Should this materialize the demand for hard assets such as gold will continue as concerns about the indebtedness of most of the western world will lend support.
Platinum has seen a strong rally over the past three weeks reaching USD 1,643 on Wednesday. This is only a whisker away from the January high of 1,657 which was reached during the frenzy that followed the successful launch of the platinum ETF in London. The move has been primarily investor driven with physical traders balking at the prospect of having to pay above USD 1,600 which is now support followed by USD 1,555.
Most of the drama this past week unfolded in the world of sugar trading with the price at one stage almost going into free fall. Sugar has now dropped 30% in 2010 almost fulfilling one of our ten outrageous claims for 2010. April Sugar on ICE NYBOT at one stage fell to a 7 months low below USD 18 before buying emerged.
Sugar has been falling on revised production estimates from Brazil and India, the world’s largest producers. Fundamentals however still point towards tightness as supplies continues to be outpaced by demand and global stockpiles are heading towards a 20 year low. The CFTC data Friday evening will be watched closely in order to gauge how much the speculative long position has been reduced. Look for support on the May Sugar #11 at USD 17.55 with resistance at USD 20.50 needed to be cleared before a resumption of the rally can begin.
