Commodities at Risk as Euro Crisis Jitters Threaten Sentiment Trends

Commodity prices appear vulnerable to risk aversion driven by rising Eurozone sovereign stress. The Fed’s Beige Book is in focus on the economic calendar.

Talking Points

• Commodities Sold as Risk Aversion Grips Markets in Overnight Trade

• Fed Beige Book, Costco Q3 Earnings Sought for Global Growth Cues

• Risk-Off Mood Hinted as Spain CDS Points to Rising Sovereign Fears

Commodities came under pressure overnight as broad-based risk aversion plays out across financial markets. The MSCI Asia Pacific regional benchmark equity index fell 0.8 percent. Newswires cited guidance in the third-quarter earnings report from Alcoa Inc as the catalyst for the dour mood. While the leading aluminum producer’s results beat analysts’ estimates after adjusting for a handful of special items, its forward guidance warned of the dangers posed by a slowdown in China and carried a downgrade in the outlook for demand.

Looking ahead, the spotlight turns to the Federal Reserve as the central bank releases the Beige Book survey of regional economic conditions. Traders continue look toward performance in the US hoping a pickup in the recovery will help offset headwinds facing global output from a recession in Europe and a slowdown in China. The third-quarter earnings report from CostcoWholesale Corp may likewise prove market-moving as traders look to the bulk retailer’s guidance for a reading on consumption trends. The API set of weekly crude oil inventory figures is also on tap.

In the background, an EU Parliament panel and the EU Economic and Monetary Affairs Committee are scheduled to hold parallel debates on Eurozone crisis resolution as banking union proposals. While concrete policy prescriptions are unlikely to emerge, traders will keep an eye on any particularly telling sideline commentary. Spanish Prime Minister Mariano Rajoy is also due to meet with French President Francois Hollande amid hopes Madrid will move forward with requesting a full-on bailout. Such an announcement seems unlikely today, but investors will keep an eye out for any remarks that shape expectations of such an outcome.

S&P 500 stock index futures are in neutral territory, offering little in terms of direction cues, but a pickup in Spanish CDS spreads warns Eurozone sovereign jitters are on the rise. This hints the risk-averse mood may carry forward into the opening bell on Wall Street, an outcome that stands to weigh sentiment-sensitive crude oil and copper prices. Meanwhile, gold and silver may see de-facto selling pressure as haven demand bolsters the US Dollar. Needless to say, a reversal toward a risk-positive posture stands to produce the opposite outcome.

WTI Crude Oil (NY Close): $92.39 // +3.06 // +3.43%

Prices are testing minor falling trend line resistance at 92.80 that has capped gains over recent weeks. A break higher targets the 94.00 figure, followed by the underside of a rising channel set from early July (now at 97.49). Near-term support is at 87.70, the 38.2%Fibonacci expansion, with a push below that targeting the 50% level at 83.76.

Commodities_at_Risk_as_Euro_Crisis_Jitters_Threaten_Sentiment_Trends_body_Picture_3.png, Commodities at Risk as Euro Crisis Jitters Threaten Sentiment Trends

Daily Chart - Created Using FXCM Marketscope 2.0

Spot Gold (NY Close): $1764.30 // -10.65 // -0.60%

Prices continue to push lower after completing a bearish Dark Cloud Cover candlestick pattern below resistance in the 1790.55-1802.80 area, a setup reinforced by negative RSI divergence. Sellers have now cleared the bottom of a Rising Wedge chart pattern, exposing the 23.6% Fibonacci retracement at 1747.20 as the next downside objective. The Wedge bottom, now at 1772.09, has been recast as near-term resistance. A push back above that threatens 1790.55-1802.80 anew.

Commodities_at_Risk_as_Euro_Crisis_Jitters_Threaten_Sentiment_Trends_body_Picture_4.png, Commodities at Risk as Euro Crisis Jitters Threaten Sentiment Trends

Daily Chart - Created Using FXCM Marketscope 2.0

Want to learn more about RSI? Watch this Video

Spot Silver (NY Close): $33.91 // -0.07 // -0.21%

Prices followed the completion of a Bearish Engulfing candlestick pattern with a drop to range support at 33.66, a barrier reinforced by the 23.6% Fibonacci retracement at 33.18. A break below the latter boundary exposes the 38.2% Fib at 31.83. Negative RSI divergence reinforces the case for a downside scenario. Near-term resistance stands at the 35.00 figure, with a break above that initially targeting the October 28 2011 high at 35.66.

Commodities_at_Risk_as_Euro_Crisis_Jitters_Threaten_Sentiment_Trends_body_Picture_5.png, Commodities at Risk as Euro Crisis Jitters Threaten Sentiment Trends

Daily Chart - Created Using FXCM Marketscope 2.0

Want to learn more about RSI? Watch this Video

COMEX E-Mini Copper (NY Close): $3.718 // 0.000 // 0.00%

Prices continue to consolidate below resistance at a falling trend line set from early February (3.820). A break higher exposes swing highs at 3.955 and 3.988. Near-term support lines up at 3.707, the 23.6% Fibonacci retracement. A push below that targets the 38.2% level at 3.627.

Commodities_at_Risk_as_Euro_Crisis_Jitters_Threaten_Sentiment_Trends_body_Picture_6.png, Commodities at Risk as Euro Crisis Jitters Threaten Sentiment Trends

Daily Chart - Created Using FXCM Marketscope 2.0

--- Written by Ilya Spivak, Currency Strategist for Dailyfx.com

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