Trading 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.

Alan Plaugmann

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.

Read the full analysis at The Swapper.

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