Global commodity markets last week were once again on the throes of escalating uncertainty what with Euro area politics, and in particular Greek political tragedy (failure at government formation), resurfacing of European sovereign debt fears amid demands to shun austerity combined with softer Chinese data, all of which triggered a sell-off.
The markets covering energy and metals, in particular, faced broad-based and widespread declines in the face of global growth concerns.
Crude oil has been under pressure with prices posting a decline on demand worries. Week on week, all base metals were down except aluminium; and in particular copper was down 4.9 per cent and nickel 5.5 per cent as the longs liquidated their positions. All precious metals were either down marginally or unchanged except gold that was up 0.4 per cent.
Many analysts agreed that the commodity market sentiment, in general, has soured and that headwinds are likely to continue to batter the market for some time until the macro picture begins to improve. The timeframe for this looks unclear on current reckoning. In the short-term, further weakness cannot be ruled out although it would be limited. So, investors ought to closely watch macro data flow and look for steady improvement in the global growth picture. Because there is widespread expectation that H2 will be better than H1 in terms of growth signals, investors should be alert to buying opportunities in the coming weeks.
It needs no renewed emphasis that China is the mover and shaker of the world's commodities market in general and metals market in particular. Recent data points from the Asian major have been mixed. As an expert pointed out, crude steel output is at a record level yet power consumption growth is low. Will Chinese demand recover in H2? Any increase in fixed asset investment is sure to improve demand for commodities.
Gold: Despite dollar strength and equity market weakness gold prices rebounded late last week. In London on Friday, gold PM Fix was $1,590 an ounce, up from $1,554/oz the previous day. Silver tagged on to gold's coattails with Friday AM Fix at $28.48/oz versus previous day's $27.48/oz.
Notwithstanding the rebound late last week, the recent steady fall in gold prices has once again raised concerns about its safe haven status. Investors or speculators have not only scaled back their long positions, but also have created short positions. For the yellow metal, the floor will be provided by support from the physical market and resilience of physically-backed ETPs. Demand from major consuming markets such as India is rather fragile, and is underpinned by threat of further policy restrictions on bullion imports.
In combination with lacklustre Indian demand, if ETP holdings were to begin to witness outflows, then gold prices could be exposed to significant downside risk. That said, the broader macro picture of uncertainty is, in traditional view, gold-supportive. Expectations on QE3 have been shifting. What the Federal Reserve will ultimately do – QE3 or no QE3 – will impact the metal. So, medium to long term outlook is more of a conjecture, while in the short-term downside risks cannot be overlooked.
According to technical analysis, as gold approaches the 1600 area, one can look for signs of a top ahead of the 1645 area. Support is near 1520. Silver looks to extend near-term gains towards the 30.00 area. The medium-term outlook is neutral.
Base metals: Global headwinds of uncertainty largely represented by Europe and China continue to batter the complex which has witnessed a sell-off. In China, the growth momentum is expected to slow further in the short-term. Zinc, lead and nickel prices appear to have the least downside from current levels. On the other hand, anticipated softening of copper imports into China in the coming months could weigh on prices in the short-term. On the LME, copper closed last week at $7,702 a tonne.
Specifically, with the market set to run into deficit in 2012, copper has the best fundamental case among all base metals. The technical picture for copper suggests extended weakness towards 7450 area in the near-term.
Crude: Prices have been falling on Greek worries and talks of release from reserves. The demand picture looks constructive. Technically, WTI looks bearish poised for a move toward 90, while a break below 108 in Brent means a further downside toward 104. The medium term outlook is bearish.