The pressure in the equity markets has taken a breather as the Chinese indices stopped their plummet for the moment, sending some mixed signals through the commodity world. One would assume that an across-the-board correction would be in the offing, but we haven’t seen that response as of yet in the energy and agriculture markets. Still, we have seen it very modestly in the precious metals markets. Gold and silver are likely seeing some stability from day one of the two-day FOMC meeting as traders could look to buy in the event of a rate hike or further indication of a rate hike as an inflationary hedge.
Other than metals, the downslide continues with WTI crude trading into the mid 46 dollar range before rallying back to 47.50. While the fundamentals appear bearish, they are most likely already priced into the market at the current rate. It seems that the market has a bit of an oversold feel. Obviously, any new bullish fundamental developments would most likely provide support in the market though there doesn’t appear to be any real bullish news on the horizon outside of mildly better U.S. economic data, which does not seem to have the strength to thwart the growing list of bear maladies effecting the declining price action.
It then makes sense to assume that a bottom in the market, particularly if we believe the oversold analysis, will come from some technical development in the price discovery that inspires buyers to revisit the market. A double bottom, failed breakout or trend line violation indicating exhaustion in a given trend should be the precursor to a correction higher. None of those powerful trend reversing chart manifestations are evident as of yet but should be closely monitored for those looking to find value following the rather steep decline of late.
Natural gas continues to be the most stubborn commodity with the volatility sinking to virtually nonexistent levels. The biggest movement we have seen in the commodity was after last week’s bullish inventory data that was immediately followed by a sharp decline. The contract rolls for options today and futures tomorrow so the likelihood is that we would see even less volatility as the market gravitates to an even strike, most likely 2.80 or 2.85. The base is certainly built for a rally with little rationale for any further downside yet the market has been reluctant to go back into the $3 range. It may have made that move already had demand questions not surfaced through Greece and Chinese issues. The premium on the options is reasonable though the time decay of the past several months of low volatility has been untenable. We continue to seek cost effective ways to remain long the contract without too much risk as we wait out the slow start to the summer market.
Volatility across the board could be muted today as is the norm when FOMC meetings are in session without any other real issues in the headlines. The committee is not expected to make any changes and there is no expansive press conference following this meeting, so any indications of timeline for a rate hike will have to be parsed out from the official released statement which can be highly interpretive. It is most probably a non-event this meeting with all eyes two months ahead on the September meeting.