GBR Market Wrap: June 24, 2011

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In this Week’s Issue

Weekly Snapshot
• Chinese premier Wen Jiabao declares inflation victory (FT)
• New orders for durable goods in the U.S. increased 1.9%, to $195.6bn (ESA)
• U.S. real GDP grew at an annual rate of 1.9% in the first quarter of 2011 (ESA)
• U.S. new home sales down 2.1% from April level, but up 13.5% a year ago (ESA)
• International Energy Agency will release 60 million barrels of oil next month (MSNBC)
• The Fed held interest rates, no hint of further asset purchases (FT)
• Fed cut its forecast for 2011 GDP growth to 2.7% to 2.9% from a 3.1%-3.3% (AP)
• U.S. existing home sales fell 3.8% in May; down 15.3% from a year ago (AP)
• Bank of England hints at second round of quantitative easing (Reuters)
• John Paulson’s hedge fund lost $500m from investment in Sino-Forest (Economist)
• Greek Prime Minister survives vote of confidence (FT)
• Japan’s exports fall 10.3% yr/yr versus forecast 8.4% drop (Reuters)

Market Barometers

Stock Market Barometer 6-24-11

FX-Commodity Market Barometer

Weekly Charts

Lots of interesting developments in the commodities markets this week.  Here’s a neat chart, courtesy of FT.com, reminding us how energy markets and political developments have always been deeply interconnected.

Historic Petrol Politics
Source: www.ft.com

All About Oil
When the International Energy Agency decided to release 60 million barrels of oil from its strategic oil reserves over the next month, the markets were taken somewhat aback. Oil prices tumbled on the news putting more downside pressure on an already shaky commodity weakened by a sluggish economic recovery. The announcement stirred up quite a bit of a debate among analysts. A perfectly timed announcement one might think as the West sends a clear signal on oil to some of the oil producing countries who elbowed OPEC into not increasing the supply of oil in their recent meeting.

Although the IEA’s role is not to manipulate prices, several said they saw it as a more of a policy move designed to bring down commodity prices at a time when western governments are struggling with unemployment that remains high and consumers that are hurting from high commodity prices.

Libya’s conflict and the often quoted supply-disruption argument is clearly visible in the difference between the two most widely watched oil futures contracts: Brent Crude Oil traded in London and Light Sweet Crude Oil (West Texas Intermediate Contract) traded at NYMEX. In recent months the roughly $15 premium of Brent Crude over Light Sweet Crude had many traders baffled into thinking this would be a temporary anomaly. Not quite, as we learned…

Daily Spot Oil Prices

This unusual price difference was recently examined by Izabella Kaminska in her post: WGO – What’s going on in Brent-WTI?

Whether it is the supply shortage or the rise of a new type of contract that will dominate prices in this market remains unclear.  It also remains questionable to what extent the IEA and other governmental organizations can actually influence commodity prices in the long term. However, we have now arrived at a price level that has captured some traders’ attention as they evaluate technical and momentum factors in their next trading decision.  Although we don’t like to commit to a specific price target, you can rest assured that oil prices won’t stay here for an extended period of time. Traders already staked out numerous price targets on both sides of the trend line. Having just taken some profits from this week’s clear sell signals, I am staying on the side lines for now. But like many others, I will be watching closely to see which side of the trend line these prices will be on next week.

Crude Oil

Connecting The Dots
It isn’t every day that the president of a country writes an op-ed piece, let alone the premier of a major global economic power like China. Please consider: How China plans to reinforce the global recovery by Wen Jiabao. I’m not quite sure what to make of this article but it does feel strange it would appear now.

Similarly, one must question the intent and timing of this week’s IEA’s decision to try and keep a lid on energy prices. This leaves us to wonder what, if any, alterior motives might be at play here. Below are some recent events and news stories that cry out for someone to connect the dots and tell us if there are indeed too many coincidences. Who would like to connect the dots?

• Fed cuts U.S. economic growth forecast
• Fed holds interest rates on hold but is concerned about inflation
• $14.3 trillion U.S. debt ceiling—out of cash in August
• IEA decides to release 60m barrels of oil from strategic reserves
• Oil price plunges over 4% on Thursday
• China’s food price inflation is at record levels
• Concerns about Chinese property prices persist
• Hedge fund loses $500m from investment in Sino-Forest
• Chinese Premier Wen Jiabao writes an op-ed piece in the Financial Times
• Hang Seng snaps three-week losing streak, ends up 1.9%
• Shanghai up 2.2%, its biggest intra-day gain in four months
• Chinese banks see biggest jump on HK and Shanghai bourses

Good luck and good investing!


Clemens Kownatzki, MBA is an adjunct professor of financial risk management at the Graziadio School of Business and Management, as well as the founder and CEO of FX Investment Strategies, a Registered Investment Advisor. In addition to running his investment advisory firm, he is a contributing author at SeekingAlpha.com and BusinessInsider.com. He also authored the book, Money Music 101, available on Amazon and Kindle, in addition to publishing the popular investment blog www.fxinvestmentstrategies.com along with a weekly newsletter.Disclaimer

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Author of the article
Clemens Kownatzki, MBA
Clemens Kownatzki, MBA
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