Commodities Technical Analysis: Global Growth Concerns Weigh on Commodity Markets
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The recent declines in commodity spread betting prices have started to gather momentum in the wake of the recent deterioration in the global growth outlook over the past few weeks.
As one of the biggest consumers of commodities in the past 3 years, China has helped drive the rise in commodity prices, with copper hitting record highs against the US dollar. This came as speculators bet that the Chinese economy would help lead the global economy in its recovery.
The recent rally in commodity prices has also been helped by the loose monetary policy of the US Federal Reserve, with last year’s $600bn QE2 program helping boost asset prices across the board.
In recent months this belief in the BRIC’s leading the recovery has been tested as central banks in China, India and Brazil have taken steps to tighten monetary policy in the face of rising inflation.
With bodies like the IMF and OECD downgrading their growth forecasts for the global economy it now appears that the tightening measures employed in China and India are starting to feed through into a slowing of growth in these economies.
Recently, ratings agency Fitch downgraded India’s growth forecast for 2012 from 7.7% to 7.5%, further exacerbating fears of a slowdown.
Concerns about a slowdown in China have also been weighing on risk appetite with manufacturing PMI’s continuing to show contraction/stagnation for the third month in a row.
Even in Brazil, the manufacturing PMI came in at a 29 month low of 45.5 in September. Export orders were also lower, with the rate of job losses strongest in the last 26 months.
The Reuters CRB index, a broad based commodity index that correlates quite well with risk appetite, appears to be showing similar warning signs and is starting to show worrying signs of weakness.
The index is currently testing trend line support from the 2008 lows at $200, which comes in around the $299 mark.
A break of this trend line on the weekly charts could well signal further weakness towards the $285 mark, which is a 50% retracement of the rise from the 2009 lows to the recent highs at $370.
The candlestick chart below bears out the recent declines in copper prices, which have slumped over 20%, and demonstrates the fall into bear market territory over the last few days.
The copper spread betting market is currently testing 14 month lows around the $3.00 mark and it appears increasingly likely that we could well see further weakness towards $2.95.
This is the 50% retracement of the up move from the lows in 2008 at $1.2550 to the highs this year at $4.6575.
Even Brent crude oil prices are suffering from the turnover in risk appetite, trading in a steady downtrend since the April highs around $127.70 earlier this year.
The current downward trend looks set to test the uptrend line from the $36 lows in 2008, currently at $95.
Another negative factor weighing on sentiment is the fact that in the 50 day MA has just crossed below the 200 day MA for the first time since mid-2010, in a classic commodities technical analysis bearish signal.
At best this signals that oil prices are set to consolidate for some time to come, as the last time we saw a death cross, oil prices traded sideways in 2010 for around three months.
At worst we could well see further declines towards $90; however one silver lining would be a fall back in inflationary pressures in the global economy.
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Original article written by CMC Markets as of 3 October 2011.
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'Commodities Technical Analysis: Global Growth Concerns Weigh on Commodity Markets' edited by DB, updated 04-Oct-11
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