Talking Points

  •  Crude Oil Breaks with Market Sentiment Trends Amid Iran Crisis Worries
  •  Gold, Silver Tracking US Inflation Expectations, US ISM Report Key Ahead
  •  Copper Prices May Bounce as US Manufacturing-Sector Growth Accelerates

WTI Crude Oil (NY Close): $98.48 // -0.30 // -0.30%

Crude oil seems to have thoroughly decoupled from risk appetite trends. Indeed, correlations between the WTI contract as well as the alternative Brent benchmark and leading stock indexes have virtually disappeared. The source of the disparity appears to be lingering uncertainty surrounding simmering tensions between Iran and Western powers.

Conflicting cues abound. US intelligence officials testified yesterday that Iran was apparently prepared to launch terrorist attacks on American soil if Washington continues to tighten the grip of international sanctions on the Tehran regime. Meanwhile, Iran's quasi-official Fars News Agency talked up progress with visiting IAEA inspectors as constructive and positive, seemingly trying to project a thaw in relations. While a swift resolution is almost certainly not forthcoming, a formal report from the IAEA itself - which has yet to comment on its Iran visit - is likely mark a break from the current standstill.

On the technical front, prices continue to consolidate above support at 97.70, with the first layer of resistance still at 101.28. A break lower exposes resistance-turned-support at the top of a falling channel set from mid-November, now at 95.79. Alternatively, a push higher initially targets the mid-November high at 103.35.

Metals_Look_to_ISM_Data_for_Direction_Crude_Oil_Diverges_on_Iran_Fears_body_Picture_3.png,

Daily Chart - Created Using FXCM Marketscope 2.0

Spot Gold (NY Close): $1737.60 // +7.53 // +0.43%

Medium-term inflation expectations appear to be the core driver of gold price action, with the yellow metal tracking closely with the 3-year US breakeven rate (a proxy for investors' price growth expectations derived from bond yields). With monetary tightening apparently out of the picture until late 2014, the spotlight turns to US economic data to gauge whether the recent improvement in the pace of recovery can be sustained, thereby driving inflation expectations higher.

Over the near term, this puts the focus on January's ISM Manufacturing report, where expectations call for industrial sector growth to accelerate to the fastest in seven months. Traders will likewise be interested to see ADP Employment Change figures ahead of Friday's official jobs report, where expectations are for hiring to slow dramatically in January after posting the strongest post-recession reading in the previous month. A Citigroup index tracking US economic data surprises has conspicuously turned lower over recent weeks, hinting the economy may be losing momentum, which may deflate bets on accelerating price growth and weigh on the yellow metal in the weeks ahead. With that in mind, it seems clearly premature to make firm directional bets for now.

The chart setup is essentially unchanged from yesterday, when pricesput in a bearish Harami candlestick pattern below resistance at 1746.10 to hint that a move lower is ahead. Early signs of negative RSI divergence reinforce the case for a downside scenario. Initial support stands at 1711.33, a former resistance level at the top of a rising channel set from early January. Alternatively, a break higher exposes 1802.80, the November 8 swing high.

Metals_Look_to_ISM_Data_for_Direction_Crude_Oil_Diverges_on_Iran_Fears_body_Picture_4.png,

Daily Chart - Created Using FXCM Marketscope 2.0

Spot Silver (NY Close): $33.18 // -0.32 // -0.98%

As with gold, inflation expectations appear to be the core catalyst behind silver prices as both metals reflect investors' appraisal of their utility as store-of-value hedges, with the ISM report key over the coming day. The technical picture appears ominous however. Prices completed a bearish Three Inside Down candlestick pattern below resistance at 34.03 and broke through the first layer of support at 33.30, with the bears now aiming to challenge the next nearby barrier at 38.78. A break below there would expose rising trend line support set from late December, now at 31.73.

Metals_Look_to_ISM_Data_for_Direction_Crude_Oil_Diverges_on_Iran_Fears_body_Picture_5.png,

Daily Chart - Created Using FXCM Marketscope 2.0

COMEX E-Mini Copper (NY Close): $3.790 // -0.036 // -0.94%

Copper prices pushed lower as expected after prices put in a bearish Shooting Star candlestick below resistance at 3.895. The bears now challenge a former resistance level now recast as support at the top of a rising channel set from mid-December (3.756), with a break below that exposing 3.713. Fundamentally, the US ISM report is in focus here as well, with a pickup in manufacturing activity promising gains for the cycle-sensitive metal. Needless to say, a downside surprise would likely produce the opposite result.

Metals_Look_to_ISM_Data_for_Direction_Crude_Oil_Diverges_on_Iran_Fears_body_Picture_6.png,

Daily Chart - Created Using FXCM Marketscope 2.0

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