Look ahead: Commodities
Crude oil, copper and to a lesser degree precious metal prices have all rallied at various points this past week. It will be interesting to see if their good run of form will continue in the new week.
Oil prices are on the verge of closing higher for the fifth straight week, unless something dramatic happens in late New York trading. Brent and WTI are basically continuing their recovery process on growing hopes that the oil market is going to re-balance itself because of strong demand and a drop in supply given the noticeable idling of oil rigs in the US in recent months and the prospects of an oil-freeze deal between Russia and OPEC. A weaker US dollar has also supported oil and other buck-denominated commodities. But both Brent and WTI look a little stretched and so they may be due for a pullback in the short-term, especially with Brent testing a prior support level at $42.50 and WTI future its 200-day moving average at $42.35. Nevertheless, the medium-term technical outlook for both oil contracts remains bullish following their recent breakouts above key levels and trend lines, as show on the charts, below.
With yields being universally low across the developed economies and the dollar falling, buck-denominated precious metals have also shone this week. They rallied strongly over the past couple of days in particular after the FOMC sounded more dovish than expected on Wednesday, which helped to push expectations about the next Federal Reserve rate increase further out. Other major central banks have also turned more dovish recently, with the ECB, for example, expanding its QE stimulus package and the BOJ cutting interest rates into the negative.
Despite this, gold traders are left with a dilemma. On the one hand, the weaker dollar and easy central bank policy is boosting the appeal of the metal. But on the other, the same factors are also helping to underpin US stock markets in particular. While both gold and stocks can rise in tandem, because of the on-going “risk on” trading environment, speculators are evidently allocating more of their trading resources for stocks and less so for the safe haven metal. However, gold hasn’t exactly fallen off a cliff (yet) and should sentiment turn sour again then traders will realise that there are not many attractive alternatives to turn to other than gold.
Silver is less of a safe haven metal than gold, hence it has outperformed in recent weeks. On Friday, both metals had eased off after posting strong gains since Wednesday. At the time of this writing silver was testing the previous resistance at $15.80. The metal has already eroded a couple of bearish trend lines and has broken above some key resistance levels, while the 50-day moving average is turning higher and the 200 is flattening. So, it will be important that the bulls hold their ground at around $15.80. Otherwise things could turn sour at the start of next week. Traders should be wary of the possibility that the dollar could find its feet again, while the whole commodities complex could come under pressure from renewed demand fears out of China. But for now at least, the technical outlook is looking bright for silver, and indeed many other precious metals including gold and platinum. Bearish speculators may therefore want to stay on the side-lines until the charts point to a trend reversal.
Look ahead: Stocks
After a stronger start on Friday, European stocks turned mixed as traders banked profit ahead of the weekend. In contrast, Wall Street was trading higher at the time of this writing. Some of the global indices looked poised to extend their advance for the sixth straight week. The on-going recovery in oil and metal prices continued to provide strong support for commodity stocks with miners once again dominating the top half of the FTSE 100 early on Friday. These stocks turned lower later on in the day however as oil eased off its highs. Nevertheless, investors have shown greater enthusiasm for equities and other riskier assets in recent days due, among other things, to the rallying oil prices and also because of the on-going central bank support. Though none of the major central banks eased their policies this week, they have all pretty much sounded dovish, with the Fed now envisaging ‘only’ two rate rises in 2016 as opposed to four back in December. The prospects of lower rates for longer and continued recovery in the oil price, means stocks could climb further higher in the short-term.
However, the rising EUR/USD exchange rate is clearly not a favourable outcome for some European exporters, which may help explain why the German DAX index has underperformed its US counterparts over the past few days. The UK’s FTSE 100 seems less deterred by the rising GBP/USD exchange rate, in part because of its larger commodity-linked constituents, but should the pound sharply extend it gains then this could well weigh on the index going forward. Looking ahead, next week’s economic calendar is going to be fairly light as far as central bank meetings and US data are concerned. But there will still be some important numbers from Europe. Among others things, traders should pay close attention to Tuesday’s data which will include the latest services and manufacturing PMIs from the Eurozone, the German ZEW Economic Sentiment and the UK’s Consumer Price Index (CPI). The US weekly crude oil inventories data, released on Wednesday, will be important for oil prices and therefore energy companies. Other important data to watch ahead of the long bank holiday weekend will includeThursday’s publication of UK retail sales and US durable goods orders, followed by the final US GDP estimate on Friday (when most European markets will be closed for Good Friday).
Technical outlook: FTSE
Despite the late sell-off on Friday, the technical outlook on the FTSE continues to look constructive. The recovery processes started back in early February when the sellers failed to hold their ground beneath the prior low at 5600. This false breakout pattern signalled a clear turning point which led to a sharp rally. The FTSE quickly climbed back to 6000 as the sellers abandoned their positions and the buyers stepped in. Since then, the FTSE has made a couple of higher highs and higher lows, further violating the bearish trend. Recently, it took out a bearish trend line, too. But then the bulls showed little desire to further bid the market higher.
The FTSE thus went into a period of consolidation, which was always going to be a healthy sign as the short-term momentum indicators worked off “overbought” conditions. But on the daily time frame, the RSI has not even reached this threshold at 70, which suggests that there may be some further momentum left in the rally. Indeed, the FTSE was trying to break outside of its recent consolidation range on Friday, though with not much conviction. Trading was painstakingly slow due to a quiet day and ahead of the weekend.
As things stand, the FTSE looks like it wants to extend its rally towards the 200-day average at 6265. Above the moving average, the next bullish target is around 6450-6505, an area which corresponds with previous support and resistance, and the 61.8% Fibonacci retracement. Meanwhile a closing break below support at 6125 would end the short-term bullish bias and may lead to a drop towards the next support zone in the 6000-6030 region.