Categorized | Technicals

Disappointing NFPs Curbs Growth Expectations and Pulls Crude Lower

Posted on 06 August 2010 by DailyFX

Speculative interests fell quickly in step with fundamental expectations Friday with the release of high-level event risk – and the reaction impact was quite severe for oil.

North American Commodity Update

Commodities – Energy

Disappointing NFPs Curbs Growth Expectations and Pulls Crude Back Down Towards $80

Crude Oil (LS Nymex) – $80.90 // -$1.11 // –1.35%

Speculative interests fell quickly in step with fundamental expectations Friday with the release of high-level event risk – and the reaction impact was quite severe for oil. Confirming the diminished confidence following the pivotal breakout above $80 to start the week, the US-based crude futures contract would close the day with its worst daily loss in eight sessions and subsequently test the former, even resistance level as fresh support. To the speculator, this is a meaningful reversal that fulfills a need to reduce the excess premium built into the nine percent rally over the past two weeks. Furthermore, the pause and tentative intraday bounce from $80 suggests the commodity will require a meaningful fundamental catalyst to establish its next trend – be it bullish or bearish.

For the fundamental oil trader, the source of today’s volatility was easily identified. The US employment indicator is generally considered a timely proxy for growth in the United States. Considering the US is the world’s largest economy, it is understandable that this particular indicator is often construed as a benchmark for global activity and thereby energy demand. Accordingly, the 131,000 net loss in jobs through the month of July has obvious, bearish implications. The headline indicator is enough to shake confidence; but the details and broader context of the report are where sentiment is really undermined. Excluding the volatile change in government employment, private payrolls grew a meager by a meager 71,000 positions. Considering the nation needs to produce approximately 125,000 jobs a month just to absorb a growing labor force (a tally that would not reabsorb the 8.4 million Americans that lost jobs over the past few years), it is clear that this indicator falls well short. What is truly concerning is that, net loss or net gain, the month-to-month trend is too moderate to meaningfully reduce the unemployment rate and bolster the consumer base. With this critical engine of economic activity running on fumes, the recovery looks to be on hold; and the glut in energy inventories will keep a constant pressure on the price of crude and other energy products.

And, while NFPs would drive crude down by driving risk appetite lower and undermining demand; it should be said that factory activity reports from the UK, Germany and Canada all came in weaker than expected to further pressure crude. For a sense of speculative interests, we look to volume on the active September crude futures contract (Nymex) which fell just short of the 7/27 high set for the contract. Also of interest, the COT numbers for August 3rd reported the fourth weekly increase in long speculative positioning. However, the 26 percent increase is still far from the levels open interest was at four months ago.

Crude Futures Chart (Daily)

DailyFX oil analysis

Chart generated usingFXCM Strategy Trader

Commodities – Metals

The Threat of a Stalled Recovery Sends Investors to the Safety of Gold

Spot Gold – $1,204.55 // $9.60 // 0.80%

The performance of gold may look slightly different depending on what market we refer to. For the spot market, the late session close would actually lead Thursday to a slight negative close; while US-based futures advanced to for its eighth consecutive session. This marks the best run for the metal since the period through November 27th (a nine-session run). However, trend and pace are two different concepts. While gold has climbed steadily since testing the trendline that defines its long-term bullish trend, the pace of its advance leaves much to be desired. Nonetheless, today’s performance stands out as one of the few strong performers while most other asset classes were steeped in red. This strength can be directly traced back to the commodity’s role as a safe haven asset.

In recent months, gold’s correlation to underlying risk appetite trends has diminished significantly. This doesn’t mean that the metal has abandoned its role as an alternative to growth- and yield-dependent assets. Rather, the slack can be attributed to the fact that investor sentiment has not established a clear and momentous run for some time now. While the S&P 500 and other favored benchmarks for risk appetite have shown short-term runs and slow drives; these securities have not dedicated themselves to a long-term trend since the market-wide tumble from April to June. This means that everything that has transpired since this point has more or less been ‘noise.’ And, considering gold’s true supports are large investors looking for alternatives to normal investment securities and volatile exchange rates, the impetus for a drive back to record highs is absent. That being said, the US NFPs today is another piece of the larger economic puzzle. The bigger-than-expected drop in net jobs confirms that the US recovery is not robust enough to return the economy to 2006/2007 levels of activity. Next week’s European growth readings will be construed in the same way. At this point, the longer the global economy struggles, the more likely it is that another financial crisis will develop and gold’s rich prices will be substantiated.

For speculators, a few interesting aspects of the market can be drawn from activity numbers. Volume on the most liquid December futures contract turned over a modest 92,912 contracts – well below Wednesday’s activity level. Furthermore, the COT report counted a 2 percent drop in net speculative long positions to 185,515 contracts through the week ending August 3rd.

Spot Silver – $18.48 // $0.15 // 0.82%

Silver advanced for a second session Friday; but progress is still conspicuously contained by the $18.50 level. Interestingly, volume on the active September futures contract was well off the equivalent highs on Monday. This was event risk vs technicals.

Spot Gold Chart (Daily)

DailyFX Gold Analysis

Chart generated usingFXCM Strategy Trader

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Written by John Kicklighter, Strategist

To receive John’s reports via email or to submit Questions or Comments about an article; email jkicklighter@dailyfx.com

This analysis is republished with permission from DailyFX, your source for daily forex market news and analysis. DailyFX is part of Forex Capital Markets.

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