Energy And Metals Move In Opposite Directions

Includes: FXI, GLD, OIL
by: Dean Popplewell

Capital markets are currently facing the perfect storm for risky assets, with negative signals coming from both monetary policy and macro fundamentals. Disappointing overnight data from the world's second largest economy is again pressurizing West Texas Intermediate oil prices in New York trading. Factory output in China shrank for the first time in seven months last night, as Chinese manufacturing PMI fell below 50 after the HSBC flash PMI reported 49.6 in May compared with a final print of 50.4 for April.

Digging deeper, both new orders and export orders were below 50 -- new export orders rose 0.9 points to 49.3, but new orders fell 1.7 points to 49.5. Numbers like this would suggest further weakness in China's domestic demand. Their new administration continues to suggest that they "have the appetite to tolerate slower growth while pursuing structural reforms." With China being the biggest buyer of industrial metals and energy, any threat to growth will obviously have a negative spill over effect to prices in the energy market.

In New York, West Texas Intermediate oil prices fell for a third consecutive day, slumping 1.6% to $92.73 a barrel. Medium-term support appears at $92.00-$92.30 and resistance at $93.05 and $93.45-$93.55.

Gold Gets a Helping Hand

Unlike the energy market, gold prices rebounded in early morning trade as signs of a Chinese slowdown fuels demand for hedge trades. Nervous investors have been looking at the "yellow metal" as a protection of wealth because everything else looks particularly bleak.

Spot gold prices are up 1% to $1,379 or $11.30 at time of writing, and potentially heading for its first gain on the week. Gold price moves so far this month, in either direction, have seemed to be massively overexaggerated due to the type of nervous trading involved. By any day's end, it's not surprising to witness price action playing out a zero-sum game through any session.

Through yesterday year to date, the yellow metal has plummeted 18% as a proportion of investors lost faith in the metal as a store of value and amid concern that the Fed may scale back economic stimulus measures. Analysts expect gold to be hard pressed to overcome weekly resistance at $1,418.32 by the end of the day tomorrow. Through $1,376 then support appears at $1,343 and resistance at $1,403 first time around.