Written by Sumit Roy  |

August 01, 2011

Market Wrap: Oil, Gold Fluctuate Wildly Amid Debt Deal

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Commodities rose, fell and then ultimately ended mixed on a volatile day in financial markets.

Overnight, Congressional leaders and the president struck a last-minute deal to raise the debt ceiling. The proposal, which will increase the debt ceiling by $2.1 trillion to $2.4 trillion in three installments, will still need to pass both chambers of Congress. Leaders are attempting to rally support from their rank-and-file ahead of the votes scheduled for later today.

The debt ceiling agreement initially sent financial markets — including commodities — strongly to the upside, but sellers entered the market aggressively after the U.S. ISM Manufacturing figure for July fell much more than expected. At 50.9, the gauge is hanging just above the 50 level that represents expansion and is now at the lowest level since July 2009. Thus, while the debt ceiling worries may now be behind us, attention now turns to U.S. economic growth, which remains dismal.

Meanwhile, China's PMI Manufacturing gauge for July fell to 50.7 from 50.9 in the prior month. Though that was the lowest reading since Feb. 2009, it was above the 50.2 that was expected.  Separately, the Eurozone PMI Manufacturing gauge for July came in at 50.4, matching the prior month's figure and the analyst consensus estimate.

Gold was not immune to today's volatile action in markets. After having fallen as low as $1607/oz, gold recovered all of its losses during the middle of the day, but prices were last trading 0.4 percent lower at $1622. Silver was near $39.35, down 1.3 percent.

Though the U.S. debt ceiling issue may soon be a memory, other bullish underpinnings should continue to support gold. Italian and Spanish yield spreads over benchmark German 10-year bonds rose to 3.55 percent and 3.75 percent, respectively, which essentially puts them back at record levels. At the same time, with U.S. economic data weakening so significantly, speculation that the Federal Reserve may initiate a third round of quantitative easing (QE3) has begun to pick up.

Crude oil began the day strongly to the upside. Before the U.S. open, Brent reached as high as $120.40 — its richest level since Jun.15. But prices soon pulled back amid the aforementioned economic concerns. WTI was last trading near $95, down 0.8 percent, while Brent was at $116.84, up 0.1 percent on the session.

Grain prices were up today as prices recovered some of last week's notable losses. Corn, for example, was last up 2.4 percent to $6.81/bushel. The grain lost 2.5 percent last Friday. Meanwhile, soybeans were up 0.3 percent to $13.59 and wheat was up 0.6 percent to $6.77.

Copper hit a four-month high near $4.50/lb on COMEX before falling 2 percent to last trade near $4.40 on the back of the aforementioned U.S. ISM Manufacturing data. Meanwhile, a strike at the world's largest copper mine, the Escondida mine in Chile, continued for a 10th day.