Commodities Will Take Cue from Stocks

 | Sep 22, 2011 | 11:30 AM EDT
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The raw commodity sector was taking a beating Thursday morning in the wake of an unimpressive statement from the U.S. Federal Open Market Committee Wednesday afternoon and amid more downbeat economic data coming out of Europe and China.

The Federal Reserve's FOMC statement laid out a bleaker world economic growth scenario, while at the same time announcing a fresh U.S. monetary stimulus measure that was deemed by the market place as benign. That set off fresh selling pressure in many markets Wednesday afternoon and then some new and weak economic data coming out of Europe and China overnight bolstered the Fed's assessment of the present world economic picture.

Nymex crude oil prices for November delivery dropped by more than $5.00 a barrel in early trading Thursday, hitting a fresh five-week low of $80.25. Meantime, Comex December gold futures prices tumbled by more than $70.00 an ounce at one point and notched a fresh five-week low of $1,731.20 an ounce. Other major commodity markets were also under strong selling pressure.

The raw commodity sector is keying off the worldwide selloff in the stock market Thursday. The U.S. stock indexes are now in danger of dropping below important technical support at their August lows. That would produce major technical damage and even suggest the U.S. economy has indeed slipped into recession again.

Importantly, the crude oil market will take its cues from the U.S. stock indexes. If the stock indexes embark on a fresh downtrend, so will crude. And the raw commodity sector, in general, will follow the price direction of crude oil market.

For the raw commodity world, it's all about the near-term direction of the U.S. stock indexes. If the stock indexes continue to sell off in the coming weeks that would suggest flagging demand for raw commodities coming from the major world economies. If the stock indexes can hold above their August lows it would suggest the worst of the worldwide economic weakness is passing by and that improving conditions lie just ahead.

One component of the downside price pressure in commodity markets recently, and in a more pronounced manner in the wake of the FOMC statement, is the sharp appreciation of the U.S. dollar against many of the other major currencies of the world.

The U.S. dollar index, which is a basket of six major currencies weighted against the greenback, on Thursday scored a fresh seven-month high. This is commodity-market bearish for two reasons. First, it makes commodity markets priced in U.S. dollars more expensive on the world export markets. Second, speculative traders for some time have been buying commodities as a hedge against a further weakening of the U.S. currency.

Veteran commodity market watchers know that market prices overdo it on the upside and on the downside. When the U.S. stock indexes do bottom out from this latest selloff, it will likely be at that point for which many raw commodity markets become value-buying opportunities for investors.

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