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Reuters: As rallies falter, eyes on China and Europe

By Barani Krishnan
NEW YORK | Sun Jan 23, 2011 8:03pm EST
(Reuters) – The decidedly bearish reaction among commodity traders last week to China’s unexpectedly strong economic growth highlighted a disturbing trend — even seemingly good news may be seen in a dark light these days.
While markets overall eked out gains last week, the upward momentum that marked late 2010 has faltered for the second time in just three weeks, and could be tough to restore this week.
Euro zone trepidation is likely to remain heavy even if a host of indicators on manufacturing, business climate, economic sentiment and money supply show improving conditions. That could mute any upside derived from gains in the euro and weakness in the dollar, which underpinned markets last week.
U.S. gross domestic product (GDP) data on Friday, expected to show growth picking up to 3.6 percent in the fourth quarter, may signal improving demand, but would also strengthen expectations that the Federal Reserve — meeting on Tuesday and Wednesday — will end quantitative easing in the Spring.
And in China, investors will be looking for clues of further monetary tightening planned by Beijing in the last full week of trading before the Lunar New Year break. After the upside surprise in GDP data last week, fears are high.
I think there are two competing stories in the near term for commodities: the euro/dollar relationship and what China does to fight inflation,” said Adam Sarhan, founder of New York-based financial advisory Sarhan Capital.
“If we see another black swan type of event emerging out of Europe, either from bad data or a country defaulting on debt, it’ll bust the euro and potentially harm global economic recovery and commodities demand. Same goes if Beijing takes more restrictive steps to curtail inflation.”
In oil, the story of the week is likely to be whether market bulls can extend Brent’s near record premium over the U.S. West Texas Intermediate (WTI) crude.
WTI is the world benchmark for oil, but Brent has been trading at a higher price than its U.S. rival since August, supposedly because of its lower supply versus the WTI.
The spread between the front month of the two crude grades shot above $8 a barrel Friday, the highest since Feb 2009, with Brent closing at $87.60 and WTI at $89.11.
Some think the premium for Brent — which has grown for months without proof of commensurate change in its stockpiles versus the WTI — has been overdone.
“The spread is starting to get rather stretched and when it does get rather stretched there is usually a sharp correction at some point,” said Michael Hewson, a market analyst at CMC Markets, a U.K-based financial derivatives dealer.
Gold is down 6 percent for January, wiping out gains in two earlier months, and could be looking to rebound after being down for three straight weeks — its longest loss in a year.
Some say gold’s allure as a safe-haven is fading, evidenced by the outflow of money from exchange-traded funds in the precious metal, as U.S. economic data come in stronger than expected and the euro zone debt crisis appears more manageable.
Reuters technical analyst Wang Tao says the spot price of bullion, which settled at above $1,342 an ounce on Friday, could sink further to $1,322.
“There is nothing definitive either way to push it,” said Hayden Atkins, Macquarie’s gold analyst.
“Day by day, the data does seem to be supportive of the theory that (economic) activity is pretty good for now, and the expectation is growing that things will be okay through the year. There is a real lack of catalysts to provide any sort of support.”
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