Despite our optimistic outlook for commodities in recent weeks, last week we flagged up cautious views for copper and oil, and yesterday, we highlighted downside risks for the whole complex on the back of a potential move in the Dow and the US dollar. This view has played out - although slightly faster than we had anticipated - with a correction in the Dow weighing on the CRB index, which broke below two-month trendline support at 225 to trade at 217 at one point yesterday. A continued selloff in equities could see further losses to the 210 area, and possibly even below the key 200 level, although we do not think we are there just yet. Such a move would also be supportive of safe-haven assets such as gold and silver.
Copper Retracing
We have been cautious copper since April 6 when we first believed the three-month contract was overbought. Indeed, we reiterated this view last week ( see: 'Commodities: Still Bullish Copper and Oil, But Cautious Short Term', April 16). Copper has now retraced by 10.2% from its April high of US$4,925/tonne, and we suggest a minimum downside target to support at US$4,237/tonne. In the event of a break of this level, we would expect further losses to support at US$4,000/tonne. A risk, however, stems from the fact that the International Copper Study Group (ICSG) will be releasing its annual copper supply and demand estimates for 2009 later this week which could have a large impact on prices. On the one hand, estimates that point to a continuation of an oversupplied market would be negative and could see a quick move to the US$4,000/level. On the other hand, suggestions of a sharp supply response by refiners could see copper hold up. As such, while we see copper correcting further, we highlight risks to this outlook. Furthermore, a sustained correction in copper would also weigh on commodity stocks such as Rio Tinto, which could see the stock retrace to support around the GBp2,000 level.
Brent Flirting With Support at US$50/bbl
Front-month Brent Crude dipped below support at US$50.00/bbl yesterday, although today it is up slightly, trading at US$50.40/bbl. Our view is that as long as the contract trades above US$50.00/bbl, the risks are to the upside, and we target the US$55.00 /bbl level. In the event of further weakness and another push below US$50.00/bbl, we highlight support at US$48.00/bbl, and US$42.00/bbl. The US$42.00/bbl level will act as massive support, and we would only reassess our optimistic view on oil on a break below this level. Given the price volatility, the oil market continues to be a trader's market for now.
Grains: Bouncing Off Support, But Risks Remain
Last week we highlighted the risk of short-term retracements to support among grains, particularly with regards to corn and wheat ( see 'Grains: Signs of Green Shoots? Soy To Outperform', April 15). These concerns have since been validated with yesterday's sharp correction in the Dow weighing on prices. That said, we maintain our view that grains look promising on a medium-term basis, assuming that key levels of support are respected on a weekly basis.
Front-month soy has retreated from Friday's six-month high of USc1,051/bushel, at one stage today trading at USc1,020/bushel. Should further retracement occur, support exists around USc975/bushel. A weekly close below this level could presage further declines, but price action should be ultimately underpinned by trendline support at USc900/bushel. Indeed, we continue to view soy as the outperformer among grains, supported by solid fundamentals.
Front-month corn maintains its uptrend, and is currently bouncing off support around USc370/bushel. A break below medium-term support at USc370/bushel would be concerning. Meanwhile, the outlook for front-month wheat is slightly more negative, as it is currently testing support at USc508/bushel. We would look for a strong weekly close above trendline support from corn and wheat to retain our medium-term bullish view on these two grains. A weekly close below support would be a negative signal, and likely prompt us to reassess our bullish view.
No comments:
Post a Comment