Commodities Vulnerable on Threat of Disappointing US ISM Data

DailyFX   |  April 2 2012 5:17 EDT

Commodity prices are vulnerable to losses if US ISM manufacturing data upsets economists’ rosy expectations, triggering risk aversion across markets.

Talking Points

• Crude Oil, Copper Vulnerable to Risk Aversion on ISM Disappointment
• Gold and Silver May Decline as US Dollar Gains on Safe-Haven Inflows

Commodity prices are showing mixed results in European trade as markets await US ISM Manufacturing data, where consensus forecasts suggest factory-sector growth accelerated in March after a pullback in February snapped three consecutive months of improvement. The print carries heavy implications for global economic growth expectations at large as traders look for accelerating recovery in North America to offset a recession in the Eurozone and a related slowdown in China (data released over the weekend notwithstanding).

The risk of a downside surprise on the ISM reading seems significant however following uniformly disappointing results on leading activity surveys released last week. This sets the stage for selling pressure to emerge across the spectrum ofrisk-sensitive assets including copper and crude oil, where prices remain closely anchored to the MSCI World Stock Index (on 20-day percent change correlation studies). Such an outcome likewise opens the door for the US Dollar (ticker: USDollar) to advance on the back of safe-haven flows, which bodes ill for gold and silver both in de-facto terms (considering both metals are benchmarked against the greenback) and with regard to reduced demand for an alternative to paper currencies.

WTI Crude Oil (NY Close): $103.02 // +0.24 // +0.23%

Last week, prices completed a Descending Triangle chart pattern with a break through support at 104.75, the 38.2% Fibonacci retracement level, implying a measured target at 99.57. An inverted Hammer candlestick above interim support at 102.97, the 50% Fib, hints a near-term bounce may be ahead to retest 104.75 before the larger down move resumes.

Daily Chart - Created Using FXCM Marketscope 2.0

Spot Gold (NY Close): $1668.35 // +6.78 // +0.41%

Prices found support at 1658.49, the 23.6% Fibonacci expansion level, and swung back above resistance at 1690.04. The bulls now appear set to challenge the 38.2% Fib retracement at 1690.04. Alternatively, a break back below 1658.49 targets 1634.62.

Daily Chart - Created Using FXCM Marketscope 2.0

Spot Silver (NY Close): $32.27 // +0.25 // +0.08%

Prices continue to consolidate below resistance at 32.93, the former neckline of a Head and Shoulders (H&S) top carved out between late January and mid-March, and horizontal support at 31.04. A break blower exposes the first downside barrier at 29.79. The H&S setup broadly implies a measured downside target at 26.84.

Daily Chart - Created Using FXCM Marketscope 2.0

COMEX E-Mini Copper (NY Close): $3.826 // +0.030 // +0.79%

Prices continue to trace out a Triangle chart pattern above support at 3.696, the 38.2% Fibonacci retracement level. While the setup is typically indicative of trend continuation, which in this case would be a bullish development, confirmation is needed on a break of either of its boundaries before firm conclusions can be drawn. Near-term support is now at 3.770, while resistance stands at 3.893.

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

To be added to Ilya's e-mail distribution list, send a note with subject line "Distribution List" to ispivak@dailyfx.com