Crude Oil Sinks on Euro Debt Crisis Fears, Gold Looks on to Bernanke

Crude oil is likely to fall along with other risky assets as Euro Zone debt crisis fears reach fever pitch. Gold is looking on to a speech from Ben Bernanke for direction.

Talking Points

• Crude Oil Sinking as Euro Debt Crisis Sets Off Risk Aversion Anew
• Gold Looks to Ben Bernanke Speech for Clues on QE3 Possibility

WTI Crude Oil (NY Close): $96.80 // +1.28 // +1.34%

Crude oil prices are sinking as S&P 500 stock index futures point over 2 percent lower ahead of the opening bell on Wall Street, arguing for more of the same as Wall Street comes online. The selloff comes as the boost to risk appetite following news that Italy’s Prime Minister Silvio Berlusconi will resign is unwound. The initial upswing yesterday came as traders took comfort in the fact that Berlusconi would pass deficit-reduction measures before leaving, meaning their implementation would not be subject to the uncertainties of a government reshuffle. Optimism quickly evaporated however as the markets digested the announcement, seemingly remembering that just passing austerity is not enough if a competent administration is not in place to implement it (Greece is a case in point).

Berlusconi’s departure – which many hoped would see the emergence of a competent technocrat care-taker government – will be followed by early elections instead, which is hardly ideal because slashing fiscal largesse is all the more difficult when politicians are trying to win votes. As this reality settled upon the markets, Italian yields soared past the 7 percent threshold that triggered bailouts in Ireland, Greece and Portugal. Italy is due to roll over 14.9 billion euro in debt just this month, which is going to prove profoundly difficult with borrowing costs so elevated. As such, the panic now gripping exchanges seems quite warranted as traders face the worst-case scenario for the EU debt crisis: a credibly imminent meltdown in a country too big to be bailed out.

Looking at the technical landscape, prices are approaching support at $94.56, a former resistance level reinforced by a rising trend line, with negative RSI divergence arguing for a bearish bias. A break though support exposes $89.65. Near-term resistance stands at $97.29, the session high.

Spot Gold (NY Close): $1786.30 // -8.80 // -0.49%

Gold is treading water as upward pressure from rising Euro Zone sovereign risk is offset by a sharp rally in the US Dollar on the back of safe-haven demand. The deadlock may see a break as Ben Bernanke takes to the wires later in the day. Last week’s disappointing ISM manufacturing- and service-sector figures as well as a dovish FOMC outcome rekindled QE3 expectations, with investors now on the lookout for any signs of an emerging consensus favoring further stimulus. With that in mind, Bernanke is scheduled to give welcoming remarks at a conference on “Small Business and Entrepreneurship” with no Q&A to follow, so the possibility that any meaningful policy clues will emerge out of the ordeal seems minimal.

Taking stock of the chart setup, prices are wedged between support at a rising channel bottom and the 76.4% Fibonacci extension at 1794.39. A break lower initially exposes the 61.8% Fib at 1772.79. Alternatively, a push upward sees resistance at 1829.31, the measured extension target level. Early signs of negative RSI divergence cautiously argue in favor of a downside scenario.

Spot Silver (NY Close): $34.98 // +0.02 // +0.06%

As with gold, silver prices are wedged between the conflicting influence of alternative store-of-value demand on rising sovereign stress and the advance in the US Dollar, with traders looking to Ben Bernanke as a possible tie-breaker. The technical landscape has been little-changed over the past two weeks. Prices continue to consolidate above the $33.00 figure, which closely coincides with the 38.2% Fibonacci retracement and 14.6% extension levels. A break lower targets the 23.6% extension at $31.39. Alternatively, a push through resistance exposes $37.25.

— Written by Ilya Spivak, Currency Strategist for Dailyfx.com

To contact Ilya, e-mail ispivak@dailyfx.com. Follow me on Twitter at @IlyaSpivak

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