Written by Sumit Roy  |

May 06, 2011

Morning Call: May 6, 2011

Details

Panic-selling in commodity markets continues to pressure silver and crude oil, but to a lesser extent than yesterday.

In the headlines today ...

• The commodities correction continues this morning ahead of the highly anticipated U.S. nonfarm payrolls report for April. The S&P GSCI is now down five sessions in a row and on track for its worst performance since 2008. While some headlines are attributing the recent selling to demand fears, the magnitude and speed of the move suggests that other factors may be at play. "It's panic," said one fund manager. "It's not a global financial crisis. It's a classic liquidation move in a crowded trade." Indeed, considering that equity markets held up relatively well yesterday, we can conclude that there is more driving this downdraft than simply economic concerns.
  Commodities Plunge for a Fifth Consecutive Day on ‘Panic' Among Investors

• The best example of the crowded trade phenomenon may be precious metals, particularly silver. After hitting fresh record highs only days ago, gold and silver prices have plunged, with the latter down over 30 percent since then. While an increase in Comex margin requirements may have corresponded with the downdraft, the primary culprit is simply an unwinding of bullish price bets. Yesterday, for example, silver ETF holdings tumbled almost 47 million troy ounces, or 3.7 percent; the biggest decline in over three years. Today we are seeing some stabilization in the complex, however, with silver lower, gold flat, and platinum and palladium actually rising.
  Silver Set for Worst Weekly Drop Since 1975 Amid Rout in Commodity Prices
  

• After getting slammed by almost $10/barrel yesterday, crude oil is sinking once again today, with WTI and Brent briefly falling as low as $95 and $105, respectively. There was no single headline or piece of data that led to this absolute drubbing in crude markets. Merely looking at price action alone would have one think that Libyan oil production was to come online imminently. But that is not the case, as the situation there remains stalemated. Rather, bullish traders all rushed to lock in months' worth of gains at once, spurring the steep decline we've seen. Nevertheless, one analyst said that "this week's selloff now appears more than corrective ... and virtually removes the possibility of fresh price highs for at least a couple months unless a major exogenous event develops."
  Crude Oil Falls a Fifth Day; Poised for Biggest Weekly Decline Since 2008 | Crude Falls More in Asia

• The agricultural complex has not been immune to the broader selling in commodities, with corn falling below $7/bushel this morning. Also hurting are figures from the USDA yesterday that showed corn export sales falling 55 percent in the week ending April 28. Even so, corn fundamentals are still seen as strong amid extremely low inventories and a slow start to the new planting season.
  Corn, Soybeans Drop as Investors Bet Demand Will Dry Up on Higher Prices
  
  

• Copper continues lower after prices broke through their recent trading range to the downside yesterday. The base metal is now at a five-month low, while zinc and nickel are at six-month and four-month lows, respectively. "Copper has been positioning itself for the worst, as people start to wonder if the U.S. economy will end up in the same shape after QE2, as before QE2," said one analyst. "Until the market figures that out, copper's performance will be plagued by uncertainty."
  Metals - London copper extends heavy losses; U.S. jobs eyed
  
  
  

What to Watch For:

8:30 a.m. EDT: U.S. Nonfarm Payrolls/Unemployment Rate

1:00 p.m. EDT: Baker Hughes Rig Count