Futures: Risk On, Risk Off

“Equity and Bond markets set the tone for commodities, although there are signs of healthy demand growth, Saxo Bank analyst Alan Plaugmann writes in his latest market update.

“Further pressure on prices could lead to cuts in production, which in turn will leave the freight markets in dire straits.”

Alan Plaugmann

Osaka Mercantile Exchange

“The main theme for this, and next week’s trade, centers around risk aversion, which by enlarge has spilled over into all market in some way or form.  Generally speaking, the main indicators for the measure of risk were lead through the Equity and Bond markets,” Plaugman writes.

Equities are under severe pressure and US and European government bonds are showing no signs of breaking the strong long term bull trend.  Both these factors are pessimistic signs of economic growth, and the consequences of both are evident in the re-balancing of investor risk across all asset classes, with no quarter on commodities.

Crude Oil has come under pressure under the current conditions, but also because of the large builds in current stocks on either side of the Atlantic.  US and Asian demand and growth estimates have kept the prices high, however are now hit by the less optimistic equity and bond markets.  Even though there is very little changed, in especially future Asian demand growth prospects, general sentiment is the driver.

The high levels in storage also have an adverse effect on the freight markets. A rather grim picture emerges for the VLCC’s (Very Large Crude Carriers) transporting oil primarily from Arabian Gulf to Japan (benchmark route TD3).  From the year low of 6.185 USD per day, which is around operating costs levels (but far below break-even levels) on 9 august the spot rallied briefly but is now back to very low levels.  Further pressure on prices could lead to cuts in production, which in turn will leave the freight markets in dire straits.

WTI Crude made a move towards the lower end of the longer term weekly trend channel.  Although it did not quite reach the $70.00 level, the losses seen over the past three weeks are significant.  A break of the trend channel leaves WTI in real trouble of further losses that could amount up to as much as 10-15%.

That being said, we haven’t broken that level, which means that we have seen market tacticians entering at these levels for strategic longs, inside the longer term trend.  The 50 day moving average still remains upwardly, and will be significant resistance on any rallies towards $76.80.

Grains have come under some pressure this week, too, although this is a fairly mixed picture across the products.  Whereas wheat prices appear to be under some pressure, corn appears to have shown that even in a risk-off scenario, it is showing strength.  The key 414.25 level was tested in corn, but even in the face of much adversity, has clawed its way back above and is now trading at the very top of the weekly range dating back to levels only seen back in 2008.  This is a sign of inherent strength in corn and more upside appears to be coming that way.

It is becoming quite apparent that the lower US corn yields are signaling to the market that the forecast deficit is widening even further than initially anticipated and that we should expect further tightening of balances, in the face of stronger demand.  This is unlike the wheat and soybean demand, that appears to have peaked, with reasonable supply in a moderate growth scenario.

Alan Plaugmann

The risk-off scenario has lead to further gains in the metals, with the all-time in gold very much in sight.  The main driver of this has been based on a flight to quality.  The risk to this move is that it is a sentiment, pure speculative driven move that in a switch from risk-off to risk-on scenario, could be vulnerable.  For gold to move into vulnerable territory, a break of 1.196 is needed in order to threaten the longer weekly bull trend, dating back from 2008.

Realistically speaking, though, the main sentiment points to a move higher in gold, with the all-time highs coming under pressure.  There does not appear to be any signs of investor risk appetite returning in the near future, which should fuel and drive gold prices into new territory.


Analysis by : Alan Plaugmann.
Head of Futures and Fixed Income

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