Market analysis: Gold one of few winners in February

Markets remained volatile last month, with currency and commodity markets turning in mixed results through February.

Energy markets remained under pressure as the benchmark West Texas Intermediary crude contract closed its fourth consecutive month lower. There were new records in the currency markets, with the Indian rupee dropping to a historic low against the US dollar. The British pound also fell, to a ­seven-year low against the greenback. Perhaps the only bright spot was gold, which continued building on its gains from January to close at 13-month highs above US$1,220 an ounce.

Oil prices were mixed at best last month.

Following a drop to $26 per barrel early in the month, the Dubai Gold and Commodities Exchange WTI contract recovered after bouncing off stiff resistance at $35 per barrel. The energy markets still remain extremely fragile, and prices remain highly sensitive to any type of rhetoric emanating from the bloc of Opec nations.

Judging by recent meetings between Saudi Arabia and Russia, markets were falsely convincing themselves of a production cut that all but failed to materialise. Instead, several of the key members of the group announced a production freeze at January levels, which already happen to be at record highs. Add this to Iran’s goal of ramping up production to make up for revenue lost during sanctions and the global supply and demand picture starts to look worse than it did in January.

Looking ahead, expect themes to remain the same in the energy markets – there would need to be a conclusive break of $35 technically to enable an extended run towards $38 to $40 per barrel. Although further downsides are more likely this month towards $30 per barrel, we do not expect any acceleration below $28 per barrel in the month ahead.

In the currency markets, the Indian rupee dropped below 69.00 against the dollar for the first time. The rupee has been one of the worst performers since the start of the year, taking cues from reducing risk appe­tite, fragile economic conditions domestically and increasing dollar demand amid foreign capital outflow.

Despite the Reserve Bank of India holding pat on interest rates during its meeting in February, the Indian data docket showed signs of weakening economic conditions headlined by slowing growth (annual GDP growth dropped to 7.3 per cent from an expected 7.7 per cent) and further compounded by deteriorating industrial and manufacturing production (minus 1.3 per cent and minus 2.4 per cent, respectively). Looking ahead, with the currency already dropping to record lows we expect to see further upsides capped in the exchange. The DGCX benchmark rupee-dollar contract for March delivery will find support at 144.00 levels followed by 142.00. On the upside, we expect initial resistance to fall at 147.30 following a second resistance level of 149.00.

The pound was also weaker on the month against the dollar, snapping through the 1.40 psychological level for the first time since March 2009. Much of the weakness in the sterling crosses has come as a result of diminishing risk appetite because of Britain’s seemingly increasing desire to exit the Euro­pean Union. With support for the exit hastily gaining momentum and parliament split down the middle, uncertainty is rife in the lead-up to the referendum, which will take place on June 23. We expect volatility to continue in the pound, with next support coming in at 1.3640.

Amid all the bearish momentum, perhaps the shining asset on the month was gold. Since the turn of the year, the precious metal has gained 6 per cent as a result of its safe haven status. We expect moderate gains in the month ahead with initial resistance falling at $1,280 followed by $1,360.

And finally, Friday’s US non-farm payrolls report is expected to show gains of 193,000 new jobs last month, with the unemployment rate expected to remain unchanged at 4.9 per cent. With the Fed in two minds regarding US interest rates, Friday’s report would need to show a strong result to justify any pot­ential Fed action. At this time it remains highly unlikely for any hawkish Fed action – the US data docket is starting to show signs of cooling off. January’s figure was revised down to 151,000 new jobs from an expected 191,000.

Despite last week’s US GDP reading revised higher to 1 per cent, a closer look at this figure shows that this may be as a result of lower-than-expected declines in inventories, and as a result we can expect a weaker reading in next month’s GDP.

Finally, personal consumption, a key part of growth figures, fell to 2 per cent quarter-on-quarter (from a previous reading of 2.2 per cent). The US economic situation would need far more upside traction for the Fed to even consider any form of hawkish action this year.

Gaurav Kashyap is the head of futures at AxiTrader ME