KASB Securities Limited and Economics Research – Commodities Corner

Karachi, July 25, 2012 (PPI-OT): China manufacturing stats drive crude prices higher

Ray of light

Oil went bid yesterday (WTI +0.4%, Brent +0.2%) after macro data showed that Chinese manufacturing was better than expected. Although the reading of the Chinese Flash Manufacturing PMI was 49.5 (not entirely optimistic) it was substantially higher than the previous reading (48.2) and suggested that latest policy easing tools by the Chinese Central Bank appeared to be bearing fruit.

However risk continued to be sold off in the wake of poor macro data, which consisted of manufacturing and services indices in the Euro zone which mostly fell below expectations. In Germany, the manufacturing gauge shrank at the fastest pace in over three years while factory activity in France also dipped substantially.

On geopolitics, the situation remains dicey as an escalated conflict in Syria is being offset by relatively softer words from Iran which has taken a turn on its stance and diffused speculation that it is contemplating a shutdown of the Strait of Hormuz.

Gold withstands the onslaught of USD

Although the noose appears to be tightening around gold with its daily trading range narrowing, the metal sustained in the green (+0.3%) despite the USD grinding higher (Dollar Index +0.4%). ‘Sell-the-rally’ theme appears to be bullion’s cue nowadays. Other precious metals however succumbed posting losses in the band of 0.2%-1.4%.

Greek membership in the Euro zone appears to be at risk as the troika’s review of the nation’s finances is in process and initial rumours indicate that targets are being missed. Equities responded in such a manner as if an unfavourable outcome was being priced in (Dow Jones -0.8%, S and P -0.9%).

Spain bond yields have kept north of 7% in the secondary market, a level which is widely seen as unsustainable and the possibility is raft that short-term debt could actually be priced higher than longer-term paper in the near-term.

Source: Bloomberg, Reuters

Key events/data releases

German IFO Business Climate: Tends to create a hefty market impact as it surveys 7,000 businesses to rate the level of current and future economic conditions.

New Home Sales: Annualized number of new homes sold in the previous month.

Crude Oil Inventories: Weekly draw at Cushing expected to decline 0.1 million barrels.

TimeCurrencyImpactEventForecastPrevious
25 July, 2012 Wednesday
1:00pmEURHighGerman IFO Business Climate

104.8

105.3

1:30pmGBPHighPrelim GDP q/q

-0.2%

-0.3%

6:00pmEURMediumBelgium NBB Business Climate

-13.5

-13.2

7:00pmUSDHighNew Home Sales

372k

369k

7:30pmUSDMediumCrude Oil Inventories

-0.1mn

-0.8mn

26 July, 2012 Thursday
1:00pmEURMediumM3 Money Supply y/y

2.9%

2.9%

5:30pmUSDHighCore Durable Goods Orders m/m

0.1%

0.7%

5:30pmUSDHighUnemployment Claims

381k

386k

7:00pmUSDHighPending Home Sales m/m

0.8%

5.9%

Source: www.forexfactory.com/calendar

Gold Spot

Technical Strategy: Sell on Strength

Gold remained relatively range bound to close marginally in the green. Moreover it stayed below its short-term moving averages. The Stochastic Oscillator has generated a weak buy signal while the RSI is neutral. A closing above its moving averages would signal further upside potential. The first support is at US$1,572.99 and second support is at US$1,563.46. The first resistance is at US$1,588.41 and the second resistance is at US$1,596.55.

Silver Spot

Technical Strategy: Sell on Strength

Silver continued to decline while staying below its channel resistance and registering a lower high and a lower low in the process. The Stochastic Oscillator maintains its sell signal while the RSI continues to show weakness as well. The first support is at US$26.61 and second support at US$26.23. The first resistance is at US$27.30 and the second resistance is at US$27.64.

WTI Spot (Crude Oil)

Technical Strategy: Sell on Strength

WTI staged a modest recovery to close in the green. The Stochastic Oscillator maintains its Sell signal which makes its formation a bearish divergence as well as serving as an adjustment to the formidable decline in the prior two trading sessions. The first support is at US$87.47 and second support is at US$86.60. The first resistance is at US$89.09 and the second resistance is at US$89.96.