Commodities May Fall as Euro Belt-Tightening Threatens Global Growth

DailyFX

Talking Points

  • Commodities Rise Ahead of French Budget, Spanish Bank Stress Test Results
  • Risk Appetite May Unravel if Fiscal Consolidation Threatens Global Outlook

Commodities are on the upswing in early trade amid a broad-based advance in risk appetite as traders encouraged by yesterday’s release of an ambitious Spanish budget await a similar result from France. Sentiment-linked crude oil and copper prices are following shares higher while gold and silver are buoyed by ebbing haven demand for the US Dollar.

Optimism may be fleeting however. Economists expect Paris will run a deficit equivalent to 4.6 percent of GDP this year, the highest among the core members of the Eurozone. This means President Francois Hollande and company may be forced to press on with tax hikes and/or spending cuts, both of which would compound headwinds for already anemic growth.

France is the second-largest economy in the single currency bloc and fifth-largest worldwide. Consensus forecasts already point to a paltry 0.10 percent GDP expansion in 2012 and a significant fiscal retrenchment may credibly tip the country into recession, with stark consequences for global performance as a whole. This means that while an aggressive deficit-reduction plan may initially boost confidence, its negative implications for output at large may quickly capture the forefront and sink risk appetite.

Separately, Spain is due to release the results of a series of stress tests of its banking sector. These will help price the assets to be transferred to so-called “bad banks” as part of the EU bailout of the country’s lenders. Traders will look to the release to gauge whether the €100 billion pledged by the regional bloc to rescue effort will prove sufficient.

On the data front, US Personal Spending and Income as well as the Chicago PMI manufacturing gauge are in focus. The final revision of September’s University of Michigan gauge of US consumer confidence is also on tap.

WTI Crude Oil (NY Close): $91.85 // +1.87 // +2.08%

Prices bounced from support at 89.44, the 38.2% Fibonacci expansion, to challenge the 23.6% level at 93.60. A break above this barrier exposes the underside of a rising channel set from early July, now at 95.81. Alternatively, a reversal through support targets the 50% Fib at 86.04.

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Commodities_May_Fall_as_Euro_Belt-Tightening_Threatens_Global_Growth_body_Picture_3.png, Commodities May Fall as Euro Belt-Tightening Threatens Global Growth

Daily Chart - Created Using FXCM Marketscope 2.0

Spot Gold (NY Close): $1777.25 // +24.50 // +1.40%

Prices remain range-bound after taking out resistance at a falling trend line connecting major swing highs since early November 2011. Near-term resistance is at 1790.55, with a break above that targeting 1802.80. The trend line – now at 1747.61 – has been recast as support. A push back below that sees initial downside barriers at 1725.87 and 1687.84, the 23.6% and 38.2% Fibonacci retracements respectively.

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Commodities_May_Fall_as_Euro_Belt-Tightening_Threatens_Global_Growth_body_Picture_4.png, Commodities May Fall as Euro Belt-Tightening Threatens Global Growth

Daily Chart - Created Using FXCM Marketscope 2.0

Spot Silver (NY Close): $34.63 // +0.68 // +2.00%

Prices are testing above resistance at 34.80, the 76.4%Fibonacci retracement. A break higher exposes 36.89. Initial support lines up in the 32.93-33.14 area, marked by a horizontal pivot level and the 61.8% Fib, with a reversal below that targeting the 50% level at 31.79.

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Commodities_May_Fall_as_Euro_Belt-Tightening_Threatens_Global_Growth_body_Picture_5.png, Commodities May Fall as Euro Belt-Tightening Threatens Global Growth

Daily Chart - Created Using FXCM Marketscope 2.0

COMEX E-Mini Copper (NY Close): $3.744 // +0.034 // +0.92%

Prices continue to consolidate below resistance at a falling trend line set from early February (3.829). A break higher exposes swing highs at 3.955 and 3.988. Near-term support lines up at 3.707, the 23.6% Fibonacci retracement level. A push below that targets the 38.2% level at 3.627.

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Commodities_May_Fall_as_Euro_Belt-Tightening_Threatens_Global_Growth_body_Picture_6.png, Commodities May Fall as Euro Belt-Tightening Threatens Global Growth

Daily Chart - Created Using FXCM Marketscope 2.0

--- Written by Ilya Spivak, Currency Strategist for Dailyfx.com

To contact Ilya, e-mail ispivak@dailyfx.com. Follow Ilya on Twitter at @IlyaSpivak

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