The double dose of weaker than expected manufacturing activity and rising short-term interest rates in China, together with the US Federal Reserve talking, for the first time, about an early end to quantitative easing, triggered these major corrections. These two themes are, and will, remain the two major themes as we head into what could become a period of increased volatility. Traders across the Northern Hemisphere are preparing to close down or reduce their exposure ahead of the summer break. During this time, which normally last until the end of August, the markets will be categorised by low activity which tends to create greater than otherwise warranted moves in the market.
The negative return on the broad-based DJ-UBS Commodity Index for a fourth week in a row was driven by selling in precious metals followed by industrial metals, with the energy sector almost being a sea of calm amid the carnage elsewhere. The agriculture sector managed some small gains, not least helped by positive returns for corn and wheat.
On an individual level, 19 out of 24 commodities fell, and given the above, it is no surprise that the bottom five were metals. Silver was very much in prominence here: it sank by 10 percent to its lowest level since September 2010, thereby bringing its 2013 loss up to almost one-third. The dollar rose by 1.4 percent against a basket of currencies which also helps to explain some of the overall price weakness.
As mentioned above, precious metals was one of the major casualties with both gold and silver reaching their lowest levels since September 2010. This downtrend was driven by a combination of a stronger dollar, rising US real yields and worries about the health of the Chinese financial system. Momentum and directional traders became aggressive sellers once the recent lows gave way resulting in the next key level at $1,300 per ounce being broken. This added to the already fragile sentiment with technical traders setting their eyes on the next technical target of $1,150.
Considering that gold has been on the slide since October 2012, and as such can be categorised as the canary in the coal mine in terms of being the warning sign that something was beginning to unfold, one could argue that most of the long liquidation from institutional investors and short selling by hedge funds has been done by now. Other markets, especially bond and equity markets in developed economies, may have further to fall. Gold could eventually receive some support on this basis, but if the dollar simultaneously strengthens the positive impact may be limited. Silver has seen lower weekly highs for the past fifteen weeks during which time its relative value against gold has moved to the cheapest since August 2010. It is now trading at an astonishing 61 percent below its 2011 peak at $50 per ounce. Any recovery at this stage would have to be driven by gold as the current supply and demand situation does not lend much support.
The near-term outlook remains fragile with the dollar regaining some of its strength while bond yields continue to rise without inflation rising at the same time. The expectations for softer US economic data over the coming quarter may not lend support to an early reduction in asset purchasing and could, if confirmed, lend support to gold. But for the moment, what with Exchange Traded Product flows remaining negative and with hedge funds content with adding to existing short positions, any near-term upside may just only be considered as being corrections.
Crude oil on both sides of the Atlantic continue to trade within established ranges. An attempt to break back above the psychological $100 level on WTI crude was abruptly halted by the Federal Open Market Committee meeting on Wednesday. The surging dollar removed support and forced hedge funds and other major speculative traders to reduce their net-long positions which by June 11 had reached a level not seen since worries about Iranian sanctions last spring triggered a rally in WTI up above $105 per barrel.
The Peninsula
