Edgy markets may see another volatile session Thursday, as the commodities shakeout plays out.
Commodities cratered Wednesday, as the theeuro skiddedand stocks sankon worries about global growth and the European sovereign debt crisis. Those fears combined to slam risk assets, and selling accelerated after government oil and gas inventory data showed signs of softening demand.
By the end of Wednesday, oil was down more than 5 percent after an unexpected gain in gasoline supply sent RBOB gasoline futures tumbling.Gasoline was down 7.6 percent to $3.1228, its biggest loss since September, 2008. Oil on the NYMEX was at $98.21, down $5.67 per barrel. After the market close, the CME announced a 21 percent hike in gasoline margins. A similar move in the silver market sent the metal reeling last week.
The Dow fell 130 to 12,630 and the S&P 500 was down 15 at 1342. The energy sector fell nearly 3 percent and commodities-linked materials shares were off by 2.7 percent.
The euro slumped 1.4 percent against the dollar, to a level of 1.4201 on concerns about Greece's debt load and as strikers in Athens protested government cuts. Gold fell 1 percent to $1501.10, and silver lost more than 7.7 percent to $35.5090 an ounce. The 10-year yield fell to 3.157 percent as investors sought safety in U.S. Treasurys.
"I think a lot of people got complacent about the euro story. I don't know if it's a correction or trend change. It's too early to tell, but people got complacent," said Win Thin, currency strategist at Brown Brothers Harriman.
U.S. economic reports could be a factor Thursday. Weekly jobless claims, producer price inflation data and April retail sales, are all reported at 8:30 a.m. March business inventories are released at 10 a.m.
The jobless claims have been particularly disappointing lately, a factor not reflected so much in last week's April non farm payrolls. Economists expect claims at 428,000, a decline from the surprisingly sharp jump last week to 474,000. Last week's claims number included some unusual factors, including an emergency benefits program in Oregon, the timing of Easter and spring break filings.
"You've got to be careful because they're very volatile, but the trend of the last three or four weeks has got to be disconcerting. It's a leading indicator. Whenever a well-established leading indicator begins to deteriorate, you've got to take notice. Is that ruining everything? No...If gasoline prices come down, maybe that will help," said Richard Bernstein, CEO of Richard Bernstein Capital Management.
Retail sales, a guage for consumer spending, are expected to rise 0.6 percent. PPI, producer-level inflation data, is expected to show an increase of 0.7 percent.
Washington will also get the attention of investors Thursday, as Fed Chairman Ben Bernanke, FDIC Chair Sheila Bair and SEC Chair Mary Schapiro testify at a Senate Banking hearing on implementation of Dodd-Frank bank reform legislation. Also at 9:30 a.m., Senate Finance convenes a hearing to discuss ending tax breaks for the largest multinational oil and gas companies, which will include testimony from the ceos of Chevron , Shell , BP America , ConocoPhillips and ExxonMobil .
Several companies report earnings, including Allianz , Kohl's , Nissan and Precision Cast parts. Nordstrom and Sun Power report after the closing bell. A negative for tech stocks Thursday may be the late day report from Cisco , which warned of a current weak quarter even as earnings beat expectations.
At 1 p.m., the Treasury auctions $16 billion in 30-year bonds.
But traders will be watching the reaction to the selling of risk assets, particularly commodities, where it was speculated that some selling was the result of big margin calls.
Bernstein had been expecting a commodities sell off. "I didn't think it would happen over a couple of weeks. Anybody who says there wasn't speculation in these markets clearly has been proven wrong," he said. "...The demand for commodities was all in the emerging markets. You have the emerging markets central banks trying to get their demand growth under control. I don't think it should be surprising to anybody. The rapidity of the decline may be shocking, but I think it shows that much speculation leverage was in there."
Colin Fenton, J.P. Morgan’s Global Head of Commodities Research, blames the correction in commodities on a global slowdown in industrial production, inventory management, and sovereign debt worries. He also says its partly due to the interplay between commodities prices, interest rates, inflation expectations, and the pace of job growth.
Fenton, however, expects the markets to reverse and raised his forecast Friday for Brent crude to $130 per barrel, from $108 per barrel. Brent was at $112.57, down just under 5 percent Wednesday.
"We're still in a shoulder season between winter and summer and we've had a sharp deceleration in Japan," he said. Global industrial production was at 6.8 percent in the first quarter and could be 3.1 percent in the second quarter before reaccelerating in the third quarter, he said. Because of the earth quake and related problems, industrial production in "Japan is contracting at 15 percent quarter on quarter at an annualized rate," he said adding it was a strong enough hit to take the global industrial production number down temporarily.
Fenton said he also believes consumers can handle crude at current levels, and that some of the high price of gasoline has to do with refining factors in the U.S. Japan, for instance, has seen its refining capacity impacted by the earth quake and tsunami. The U.S. market had been bidding up gasoline this week, prior to inventory data, in anticipation that flooding in Louisiana could impact refineries there.
He notes that if refineries were operating at higher levels, gasoline would be cheaper. He said the gasoline equivalent of $100 oil is $2.38 per gallon.
Fenton also sees early signs of a pickup for copper, which fell 3.2 percent to $3.9020 per pound in Wednesday's selling spree. It is down 15 percent from its Comex record of $4.623, reached Feb. 11.
"The Chinese merchant is coming back into the market at these prices... The economy that accounts for 40 percent of world consumption and also has a 40 percent import dependency ratio, is buying. For me, that's a fabulous statement because what is happening is a transition," he said. He points to the Shanghai copper forward futures curve, which had been in contango for months but now has rotated back into backwardation. Backwardation is when futures prices are lower in the distant delivery months than in the front months.
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