Crude oil recovers in Asian session Monday after price plummeted as US employment disappointed last Friday. Price fell as much as -2.4% after headline payrolls reduced -131K in July but buying interest emerged above 80 - a resistance-turned support. Oil prices will continue to be influenced by macro events as global economic outlook, especially in the US and China, is indicative of the demand/supply balance.
Meanwhile, correlation between oil price and equities remains high as the latter has been treated as a barometer of economic prospects. The following chart shows that crude oil price and S&P 500 Index has been positively correlated since 2009. However, such relation is not a traditional one as when we take a look at a longer series, the correlation in fact fluctuates from positive to negative. Higher crude oil price was viewed as a drag to economic growth. Moreover, it increased costs of companies (most companies use energy as input) and adversely affected profits.
Gold changes little after gaining for 8 straight days. While China's relaxation of trading rule buoyed buying last week. Without disclosure on further details, the theme will fade sooner or later. The more imminent catalyst is Fed's QE2. Weaker-than-expected employment data intensified speculations that the Fed will announce more non-standard measures. Notwithstanding recent disappointment from the data front and rigorous debates on reinvestment of mortgage-backed securities runoff, market opinions on whether the Fed will announce more easing measures at the upcoming FOMC meeting (Tuesday) are not unanimous. While some expect/hope policymakers will 'do something', others anticipate they will wait for a few months more. Should the Fed leave things unchanged at Tuesday's meeting, gold may weaken. Concerning interest rates, it's highly likely that the Fed will leave the Fed funds rate unchanged at 0-0.25%. The market currently prices in a 71% chance the Fed will cut its benchmark interest rate or leave it unchanged by its June 2011 meeting, compared with 33% a month ago.
Apart from the FOMC meeting, important US economic data to be released this week include US retail sales (Friday) and CPI (Friday). In the Eurozone, the government will report advance estimates of 2Q10 GDP data (Friday) for Germany, France, Spain and the region as a whole. In the UK, the quarterly inflation report (Wednesday) will unveil BOE's latest inflation and growth forecasts.
Commitments of Traders
Speculators were bullish on the energy complex with long positions outnumbering short positions in oil-related futures in the week ended August 3. Net length for crude oil rose +11.4K to 55.7K, the highest level in 11 weeks. Fears of supply disruption by tropical storms boosted buying interests. Meanwhile, strength in stock markets during the reporting period also lifted price. Net lengths for heating oil and gasoline also surged to 31.5K and 51.2K respectively. Note that net length for heating oil more than doubled from a week ago. A jump in long positions together with a drop in short positions helped. Net shorts for natural gas dropped more than 3K to 150.3K.
With gold as an exception, net lengths increased in general for precious metals. Rise in risk appetite and signs of strengthening in Eurozone's economic outlook weighed on gold. While short positions dipped -2.2K during, long positions dropped more, by -5.5K, resulting in a net decline in net length, of -3.4K, to 185.5K. Net length in silver rose +6.2K to 36.5K. For PGMs, net lengths for platinum and palladium soared to 17.9K and 14.2K respectively.