Commodities
Volatility Reigns The price action of front month Brent acted according to our view last week. The contract bounced briefly to resistance in the US$61.00/b area before resuming its downward momentum. The strong end-of-week close, taking Brent back to the US$58.50/b region suggests more of the same this week.
Indeed, with daily RSI showing possible bullish divergence, and the US$57.00/b level acting as major trendline support, Brent looks set for another bounce in the early part of the week. However, we stress the importance of the US$61.00/b resistance area, and only a decisive break above this point would set up a re-test of the August highs. Instead, the market could well trend lower, with any fall below US$57.00/b heralding a more prolonged correction. We still believe, though, that prices will be underpinned on a medium-term basis by the confluence of global geopolitical risks, and robust global demand. Q305 real GDP growth in China of 9.4% reveals that the economy is still booming, and that demand for both raw materials and energy products will remain strong going forward. With infrastructure spending in the country likely to continue apace, we believe that demand from China will ensure that the commodity bull market is not over yet, despite this current period of correction for oil.
As expected, gold slipped further last week, dropping below the key US$465.00/oz level. Currently at US$461.00/oz, any break below US$459.00/oz sets up a test of US$450.00/oz, and possibly even the US$447.00/oz area. At this stage, only a close back above resistance in the US$465.00/oz area would re-ignite the bullish view, suggesting a move back to US$474.00/oz. We still like the precious metal on a medium-term basis, but the current correction looks as if it has further to run.
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