Oil regains losses as gold loses safe haven status

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Ashley Young

Yesterday was not much different than the last month or so... another trading session dominated by a high level of volatility caused by a growing uncertainty over the economic recovery in both the US and Europe coupled with mounting exposure to the sovereign debt issues in the EU and the deficit in the US. The week started all about Europe as the sovereign debt issues drew the attention of all of those in the market on a day when liquidity was limited by the US holiday. Concerns over the potential for default in both Greece and Italy once again stole the headlines and became the main price driver for all risk assets... at least for a day.

However, as the full complement of market participants hit the scene on Tuesday the downdraft that began on Monday started to subside. In fact after the initial sell-off, US equities gradually moved into an intraday recovery rally re-taking about two thirds of its earlier loss in equities by the closing bell. Oil and most other commodity markets followed suit as the US dollar (and gold) also began to lose its safe haven status and moved into negative territory. The short covering rally has continued overnight as Japan reported that their recovery from the earthquake and tsunami was on track and as such have left interest rates unchanged while Australia reported a better than expected GPD for the second quarter of 1.4%. In addition there was talk overnight that China may be on the cusp of moving to a less restrictive monetary policy in the near future.

In fact as of this writing most equity markets and oil prices are now fully recovered (and then some) from Monday's sell-off but still are below the level they were trading at prior to the bearish jobs number released in the US last Friday. The spot Nymex WTI contract is currently higher by about $0.30/bbl versus Friday's closes (discounting all of the EU sell-off from Monday) but still about a $1/bbl or so below where it was trading prior to the jobs data. The good news is the markets have now pretty much discounted the EU issues (for the moment) and yes some of the latest macroeconomic data is better than expected (Australia). However, the bad news that continues to impact the markets is simply the fact that the global economy is slowing and how quickly and how deeply it contracts will dictate the ultimate direction of all risk asset markets. I view the gains in oil and equities which began mid-day yesterday US time to be nothing deeper than a short covering rally at this point in time.

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