David Stockman explains why the stock and bond market could be on the verge of a collapse.» Read More
Crude has had an incredible run over the past two weeks. But I'd think twice before hopping aboard this speeding train.
At today's highs, August crude oil futures was up more than 12 percent in two and a half weeks. It would be easy to attribute this rally to tensions in Egypt, but that would tell only part of the story. Both crude and S&P futures began their move on June 24, and although the move in stocks hasn't been as dramatic, it's reasonable to assume that part of crude's move is due to a prevailing risk-on mentality.
(Vote in our poll: Has Oil Hit its High for the Year?)
Gold bugs are doing their best to defend $1,200.
Gold retested $1,200 on Friday, trading down nearly $50 from the highs following a much-better-than-expected employment report. We are not seeing the weakness follow through in this session, as the market has stabilized and is retesting the $1,233 retracement level, which will now serve as resistance. A close above $1,233 on Monday will signal a likely consolidation back toward $1254.60 to $1,255.70 this week.
Friday's jobs report led the U.S. dollar to soar to new swing highs, putting pressure on commodities priced in dollars, which we saw clearly in the metals. On Monday morning, the dollar was slightly in the red, which was giving the metals a breather.
(Read More: Gold's Jobs Nightmare)
The economy just got some great news, and gold hates it.
The U.S. economy added 195,000 jobs in June, easily besting the 165,000 consensus estimate. As soon as it heard the news, gold tanked $26, dropping to the lowest level in a week. But why?
"Gold hates any good U.S. data at this stage," said Kathy Lien of BK Asset Management, "because any kind of good news is driving the dollar sharply higher, and gold is just being punished as a result."
(Read More: Job Growth Posts Large Gain in June; Rate Holds)
For Lien, the Federal Reserve's tapering plans remain the market's main focus. And she believes that today's number "overall reinforces the idea that the data is good enough to taper in September."
(Read More: Why Fed May Hike Sooner Than You Think)
That is certainly what the bond market seems to imply. Yields are rising as traders expect that the Fed is now getting the economic signals it needs to exit the bond market shortly. And as yields rise, gold looks like a worse and worse investment, because its zero percent yield looks increasingly meager when compared to the yield of Treasury notes.
(Read More: Why Higher US Yields Should Cheer Investors)
As George Gero, gold analyst at RBC, wrote in a note: "Bond yields jumped higher," which makes for "strong dollar and weak metals."
It's been one of the worst investments of 2013—and this Roubini strategist thinks it will get even worse.
Gold, copper and grain prices have dropped precipitously this year. In fact, JPMorgan's commodity team recently used that as a reason to get bullish on the space. "In a number of commodities, prices have fallen far enough for long enough to force involuntary cuts in production and to spur fresh demand," JPMorgan's note read.
In fact, JPMorgan said that "Sentiment is universally bearish," creating some real opportunities.
But Gary Clark says that sentiment is bearish for a reason. On Tuesday's "Futures Now," the commodities macro strategist at Roubini Global Economics listed the three catalysts that will continue to drive commodity prices lower.
Reason One: Declining Chinese Demand
Chinese expansion has been a huge factor that has undergirded the long run up in commodity prices. But now, "we're seeing weakening in demand growth across the board there," Clark said.
As Clark predicts in a recent note, "China's slowdown will accelerate next year, driven by a collapse in the metal-intensive, investment-driven portion of growth. Demand for metals will fall much more sharply than headline GDP growth numbers would suggest, from double-digit to low single-digit growth and possibly to zero" in the case of iron ore.
And just how important is Chinese demand? "To offset a 1 percent decline in Chinese copper or aluminum demand would require a 3 to 5 percent boost in U.S. or European demand or a 15 to 20 percent boost in Indian or Brazilian demand," Clark writes, adding: "all of which are highly unlikely."
Call it a crude awakening. Geopolitical risk, a large inventory draw, and anxiety about going home short over a holiday weekend have set up oil for higher prices.
Crude oil futures have seen a tremendous move higher this week, as the momentum that carried oil from last week's bottom on the worries of China's cash crunch has been accompanied by this week's tensions in Egypt. In addition, oil is entering the peak of demand season this week. And on Tuesday, inventory data from the American Petroleum Institute showed a tremendous draw. All in all, traders have been given every reason to buy this market.
(Read More: Oil Rises on US Oil Stock Decline, Egypt)
After the API data, crude was able to test a high as $102.18 on Tuesday night. The market has already begun correcting back below $101. Wednesday's Energy Information Administration data will be released as regularly scheduled, and will be one of the most closely watched inventory numbers in recent weeks.
Support will now be found at $99.98 to $100, and a close below here will show signs of a failure. To maintain this pace of momentum, bulls want to see a retest of $102 on Wednesday, and a close above $101.20.
As the situation in Egypt escalates, crude oil prices have approached the $100 mark. There is always a significant risk premium built into the price of crude based on the tumultuous political nature of the Middle East. Egypt is not a huge oil producer, but it is important to the oil market because of its proximity to key shipping lanes.
(Read More: US presses Egypt president Morsi to make political concessions)
In reality, the massive protests against Egyptian President Mohamed Morsi we are currently seeing probably won't end up resulting in any supply disruption—or at least, any disruption that offsets the decent supply levels of global crude.
The issue, however, is that the market has been reminded that there is headline risk, and that short oil positions can cause anxiety. This is particularly true considering that the market will be closed for the Fourth of July holiday.
Gold is enjoying a corrective bounce—but investors shouldn't get too excited yet.
Bullion showed signs of life in the second half of the session on Friday, and recovered from its lows to trade above resistance and close at $1,223.70.
On Monday, gold reached a high of $1,247.40, and is trading at roughly $1,240. We believe this to be short covering into the end of the month and the end of the quarter, as investors lock in profits from this bear market.
(Read More: Three Reasons Gold Will Go to $800: RBC Strategist)
They're two of the assets investors have loved the most for quite awhile—and this year, they've been two of the most disappointing.
Apple and gold are both down more than 25 percent in the first half, with the latter performing the worst. But Mark Dow of the Behavioral Macro blog said the two could follow very different trajectories in the second half.
"Apple is in the later stages of a bubble," Dow told "Futures Now." "Gold, on the other hand, is in the acceleration phase of an unwinding bubble."
That means that the two will trade differently.
Apple, he said, "is trading on the idiosyncratic factors of Apple: 'Have they come out with something new? Are they going to?' "
Gold, however, was pumped up because of a macro thesis that was simply incorrect, according to Dow.
"People were fundamentally wrong about the consequences of printing money, and they're just coming around to this realization now," he said. "It's not just the recent Fed actions. Gold has been going down for two years. It's just now that it's starting to accelerate that it's really catching people's attention. So gold, in my view, has much, much further to go."
If history repeats itself, we could see another 11 percent of downside in gold.
The metal stretched itself to new lows early in the Thursday night session, reaching $1,179.40. However, we are starting to hit oversold conditions: Four out of the five major technical indicators that we follow are showing oversold.
Gold has recovered somewhat in early Friday trading, reaching a high of $1,211.40 before consolidating back below $1,200.
(Read More: Three Reasons Gold Will Go to $800: RBC Strategist)
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