Talking Points

  •  Crude Oil Outlook Clouded with Risk Sentiment Trend in Flux
  •  Gold, Silver Gains as Fed Officials Talk Up QE3 Possibilities

WTI Crude Oil (NY Close): $87.40 // +2.10 // +2.46%

Crude oil remains firmly anchored to underlying risk appetite, showing a firm correlation with the S&P 500, which casts a cloud over the near-term outlook as markets conflicting cues from economic data with an unnerving outcome to the first part of the week's EU debt crisis summit.

On that data front, HSBC reported that Chinese manufacturing grew for the first in four months while Japanese export growth slowed in September but still more than doubled economists' forecasts. On the other hand, the preliminary set of October's Euro Zone PMI readings showed activity in the manufacturing and services sectors shank at the fastest pace since July 2009.

As for the EU summit, policymakers seemed to make little progress. Greek restructuring was shelved in lieu of the familiar tactic of asking banks nicely to take some losses on their bond holdings. On bank recapitalization as well as a cash backstop for other troubled countries, the issue of funding remained unresolved as Germany nixed a plan to give the EFSF bailout fund the ability to borrow from the ECB. Officials did seem to agree that the EFSF could only be used to backstop banks if private and national efforts failed to succeed. This implies that the still only €440 billion-strong fund would only come into play after a fire-sale of bank assets and a sharp increase in national debt levels, which seems hardly encouraging.

Looking ahead, the Chicago Fed National Activity index is on tap. S&P 500 stock index futures are swinging between losses and gains, offering no clear view of directional conviction. On the technical front, prices bounced but failed to overturn the Bearish Engulfing candlestick pattern below resistance at $90.10 identified last week. The overall setup continues to hint the path of least resistance leads downward, with initial support marked by the 23.6% Fibonacci extension at $84.61.

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Spot Gold (NY Close): $1642.38 // +21.57 // +1.33%

Gold mounted a recovery towards the end of last week that has continued to play out ahead of the opening bell on Wall Street after comments from Federal Reserve policymakers Daniel Tarullo and Janet Yellen set off speculation that the possibility of a third round of quantitative easing may yet materialize, driving demand for the yellow metal as an inflation hedge. Tarullo urged the Fed to embark on large-scale purchases of mortgage-backed debt while Yellen hinted that new securities purchases might become appropriate.

On balance, it seems such sentiments ought to be taken with a grain of salt. Tarullo and Yellen both fall firmly on the dovish spectrum, and calls for more accommodative policy are not unexpected from them. Looking at economic data, the case for QE3 is tough to make. As we discussed in detail last week, data on economic surprises compiled by Citigroup shows the pulse of US fundamental news has been steadily improving since early June, while Ben Bernanke seems to have expressed a preference for non-QE policy options. Still, airing out calls for an expansion of the Fed's balance sheet can certainly prove supportive for gold over the near term, though it seems doubtful that such strength has staying power.

Sizing up the technical landscape, prices continue to consolidate in the $1600-1700 range that has persisted since late September. A bullish Piercing Line candlestick pattern at support hints an upswing is ahead, exposing initial resistance at $1660.55 followed by another challenge of the $1700 figure.

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Spot Silver (NY Close): $31.39 // +0.79 // +2.57%

As with gold, the mention of additional QE by Fed policymakers has underpinned silver, but support from this source is likely to prove fleeting. On the technical side of things, prices put in a Bullish Engulfing candlestick pattern above support at $30.33, the 23.6% Fibonacci retracement level, hinting to challenge the recent range top at the 38.2% Fib ($32.98) is ahead.

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