EU carbon prices recovered losses posted early on Monday on the back of tumbling commodity prices, as a stronger euro helped EUAs finish the day in the black.
Front-year futures ended up a cent at their intraday high of €8.22 after slipping to an eight-day low of €8.06 earlier amid spreading fears that China’s economy was slowing.
Commodity markets dropped on Monday, with crude oil falling to a six-and-a-half year low and analysts warning that investor sentiment was at its lowest since the 2009 financial crisis – a sign they may seek safer havens such as government bonds.
Front-year German 2016 baseload power prices settled below €30 for the first time since 2003, shedding nearly 60 cents to €29.77/MWh on EEX. The Cal-2017 and 2018 contracts followed suit, settling at €29.14 and €29.27 respectively.
Equities were also under pressure, with China’s equity market plummeting by more than 8%, its steepest one-day fall since 2007.
Europe’s major equity indices were down by more than 5% at one point on Monday, and the US Dow Jones Industrial Average dropped by more than 1,000 points in early trade.
However, the euro surged against the dollar, briefly climbing to a seven-month high above $1.17, as speculators bought back the European currency that they had used to fund carry trades due to its low borrowing cost.
That, coupled with a drop in dollar-denominated API2 coal prices, offset the decline in German power prices and pushed the Cal-2017 and 2018 clean dark spreads to levels not seen since early June.
HIGHER AUCTION VOLUME LOOMS
The early slide in EUAs extended a 2% drop on Friday as traders took profits following a 54-cent run-up the previous week that repeatedly extended a 33-month high. The contract peaked at €8.43 last Thursday.
Bernadette Papp, an analyst at brokers Vertis, said that technical signals had been indicating for several days that carbon would be due to fall.
“The chances for the correction are increasing also as the period of low auction volumes comes to an end soon and traders might purchase the allowances less actively,” she wrote in a weekly blog post on Monday.
Speculators had bet that the market could sustain an upward move while auction supply was half the usual due to a scaled back August sales calendar. However, they are expecting that prices will weaken as regular auction levels return next week, when weekly auction volume doubles to 12 million.
The EU’s sale of 1.459 million spot EUAs on EEX on Monday cleared at the same level as prices in the secondary market, with futures prices little changed following the auction.
It was 3.76 times oversubscribed, slightly above the month’s average of 3.48 and the year’s average of 3.09.
Papp pegged some support at the 20-day moving average of €8.08 and the 30-day simple moving average at €8.02, with the August low of €7.76 seen as a more distant support level.
“We are now facing a retracement which has a support level on the Kijun Sen at €8.07,” said trader and technical analyst Lorenzo Monaco in his blog.
The Kijun Sen, also called the Kijin Line, is the mid-point between the highest high and lowest low of a particular security – in this case the Aug. 10 low of €7.76 and the Aug. 20 high of €8.43 for the Dec-15 contract.
“It can be seen that since last April the Kijun Sen has done a quite good job as support. The bullish long term is still well protected by the strong support levels at €7.75 and €7.68,” he said.
Monaco added that he is bearish with a downwards target of €7.96, and remains so in the short-term until the €8.25 level, which now acts as upwards resistance, is breached.
Below are the auctions this week, distance to secondary spot market, and bid-to-cover (btc) ratios:
8/24/2015 EU 1,459,000 €0.00 v spot, btc 3.76
8/25/2015 EU 1,459,000
8/27/2015 EU 1,459,000
8/28/2015 DE 1,599,000
By Ben Garside and Mike Szabo – firstname.lastname@example.org