Commodity Rout Continues

Daily Analysis - 24/07/2015

Weakness in Commodities Resumes as Investors Continue to Unwind Exposure

Yesterday’s weakness in energy prices quickly spread to base metals and then precious metals as concerns about the Chinese slowdown and global trade downturn spread across the commodity complex. The crash raises further anxieties that the global economy is headed for another recession.

Gold Crashes Again

Following yesterday’s weakness in oil prices which saw WTI fall below $49 per barrel on renewed oversupply concerns, other commodities started to experience a selloff, namely copper prices which fell to 6-year lows. The sheer amount of production capacity added over the last few years coupled with a slowing Chinese housing market have contributed to steeper losses in the base metal after it was revealed that supply outstrips demand by a wide margin. Quickly following overnight was the weakness in natural gas catching down to the softness in crude oil prices. However, most notable was the crash in gold prices which briefly breached the very important $1080 level on the downside. Just after 02:00 GMT gold prices smashed approximately 0.50% lower before recovering modestly and experiencing another wave of selling after 03:00 GMT which saw gold give up another $6 points.

UK Retail Sales Miss

Amid all the optimism surrounding the talk of higher interest rates ahead for the UK economy, retail sales numbers dispel the notion of forward progress in the underlying fundamentals. Both core and regular retail sales printed in contractionary territory after experiencing stronger growth in the prior months. This comes on the heels of the revelation that all of Monetary Policy Committee voting members voted to leave the key interest rate unchanged at 0.50%. However, policymakers cited the potential for inflation to rebound quicker than anticipated, setting the stage for imminent rate hikes, potentially before the end of the year if the situation merits. While experiencing the fastest growth out of the G-7 currency nations, the slowdown in spending could highlight the pullback in consumption that may complicate the Bank of England’s policy outlook. The GBPUSD continues to trend lower as the dollar rebounds from near-term weakness.

Chinese Manufacturing Slumps

The HSBC Manufacturing PMI released overnight from China revealed the weakest manufacturing picture in 15-months, falling from 49.4 to 48.2. This comes amid other startling data points as Chinese policymakers struggle to contain the losses in the equity markets after spending nearly 10% of annual GDP to prop up the markets. Nevertheless, despite a substantial amount of capital deployed to rebuild confidence in the volatile stock markets, many investors continue to hold a bearish view, contributing to further losses in the key benchmarks overnight. From the perspective of the real economy, the latest figures on energy consumption also appear to confirm the fragility of the manufacturing sector with demand growing at the most sluggish pace in 30-years. When added to the woes mounting in the housing sector, the selloff in commodities overnight requires more limited explanation due to the confluence of factors dragging on prices.

USDCHF Equidistant Channel Technical Pattern

After experiencing a minor pullback earlier in the week, the dollar momentum higher has once again resumed on the back of stronger employment data and positive housing news. Meanwhile, the continued Swiss intervention to keep the Franc weak has added to the rally in the USDCHF pair which is currently trending higher within an equidistant channel pattern. The pattern is exhibiting a strongly bullish bias with ideal positions taken near the lower channel line targeting the upper channel line. Fighting the prevailing uptrend is not suggested due to the increased risk and diminished reward potential. However, should the pair take a plunge below the lower channel line, it could be indicative of a channel-based breakout to the downside to be accompanied by a strong reversal lower and increased downward momentum.