Greek sovereign crisis continued to grab the center stage last week. Investors remained skeptical about the ability of the110B-euro bailout plan in containing deficit problems in the country. Worse still, investors' confidence over bonds in peripheral European economies such Spain, Portugal and Ireland tumbled amid contagion fear and downgrades by rating agencies. Yield spreads and CDS rose sharply.
The ECB left the main refinancing rate unchanged at 1% and did not implement further easing measures (such as bond purchase) to alleviate the problem unnerved investors and triggered further selloff in the euro.
UK's general election resulted in the first hung parliament since 1974. While the Conservative Party got the most votes and the most seats, it was short of a majority. Sterling tumbled as investors worried the situation will delay legislations to reduce deficits.
Dataflow was generally encouraging. What caught the most attention was US non-farm payrolls which rose 290K, the strongest gain since March 2006, in April while February's reading was revised to show a jobs gain. Although unemployment rate rose to 9.9% from 9.7% in March, it was due to the increase in participation rate - individuals who had given up looking for jobs returned to the market. This is a good sign somehow as it signals better confidence. We would say this set of data encouraging but stocks and most commodities failed to recoup losses. Rather, the dollar strengthened amidst expectations for an earlier Fed rate hike.
Crude Oil
Oil prices weakened again after brief recovery to 78.19 earlier on Friday. Concerns that Greek sovereign crisis will dampen global growth momentum overshadowed encouraging economic data. The front-month contract of WTI crude oil price slid -2.6% Friday. Settling at 75.11, the contract slumped -12.8% last week, the worst since December 2008. Brent crude, losing -10.5% during the week, performed relatively better than WTI crude.
The US inventory report was disappointing. Crude oil inventory surged +2.76 mmb to 360.6 mmb in the week ended April 30, despite rise in utilization rate. Compared with market expectation of a +1.1 mmb build, the actual increase was more than double and a large part of it was driven by Cushing stock which soared +1.68 mmb to a record high of 36.2 mmb. Surge in Cushing stock was the reason causing Brent-WTI Premium to widen.
Gasoline stockpile rose +1.26 mmb as decline in production was more than offset by surge in imports. Demand was flat during the week. We expect inventory to being dropping in coming weeks as the driving season arrives. Distillate stockpiles climbed +0.57mmb but demand improved +8.28% to 3.895M bpd.
Look at a bigger picture, demand outlook in the US has indeed been improving, albeit at as modest pace. Preliminary data from the US Energy Department showed that oil demand rose +2.1% y/y in April, following +2.9% and +3.3% gains in March and February. Demand for gasoline and distillate also showed impressive growth with the former rising +3.1% y/y and +1.5% y/y in April and March respectively while the latter reversed from decline to growth of +5.1% y/y in April. Mind that preliminary data are usually subject to downward revision. However, these are initial signs of oil market recovery in the US.
Utilization rate advanced to 89.59% last week. This was the 7th consecutive weekly increase and marked an over 10% rise from the trough of 77.7% in the beginning of the year. Improved refinery revenues as suggested by rising cracking spreads will continue to boost refinery runs. Although demand outlook has been recovering, we concern that the still-sluggish US oil consumption will not be able to take up a faster increase in supplies.
While the market has attributed this week's crude oil selloff to strength in USD, a more prominent driver was slump in stock market. It's true that oil and USD had traded with strong inverse correlation, especially in 2007 and 2007. Such correlation diminished in late-2008. In 3Q09, USD index reversed its multi-month decline and made a bottom at 74.27 but crude oil continued to rise, failing to drop although the dollar rose. This signaled the relationship between oil and USD has collapsed temporarily.
On the other hand, correlation between equities and oil has increased since September 2009. Despite periods of decoupling during late-2008 and 1Q09, the 2 have been moving in tandem for most of the time in 2009 and so far in 2010.
Natural Gas
Gas was one of the very few commodities what move 'steadily' last week. Moving with a range of 3.855 and 4.101, gas price remained in 8-month lows on oversupply concerns.
Gas storage increased +83 bcf to 1995 bcf in the week ended April 30, worse than market expectation of a lower build of 80 bcf and bringing stockpile to +18.8% above 5-year average. However, this was later offset by a 5-unit-drop of gas rigs to 953 units this week. Higher-than-expected payroll figure also lent support to price.
In coming weeks, gas price may continued to be less affected by macroeconomic news and sovereign crisis in the Eurozone as it has been severely dumped over past few months due to its own surplus concerns. However, risk is tilted to the downside as inventory remains ample and there's no positive catalyst in the near-term.
Precious Metals
Gold shone and rose above 1210 (record high at 1227.5) Friday as sovereign crisis deteriorated. The benchmark contract gained +2.52% last week despite euro's slump of over -4%. Price action in recent weeks suggests gold and USD is moving tandem, a phenomenon usually occurs at period of extremely high uncertainty or during crisis. The last time this happened was in late-2008 to early-2009, when the market was nervous about the collapse of global financial system after Lehman Brothers went bankrupt in September 2008.
SPDR Gold Trust, the world's biggest gold ETF reported that bullion holdings in the fund surged to a new record high of 38.21M oz on May 7. The weekly increase of +2.54% was the strongest since March 2009.
Apart from ETFs, demands for gold coins and bars were also strong, signaling investors' need for safe haven assets.
Silver jumped in NY session Friday, resulting in a one-day rally of +5.34% and paring the weekly loss to -1%. Silver, as well as PGMs, performed more similarly to industrial metals during the current crisis given their heavy reliance on industrial demand. Should European fiscal problems result in global economic slowdown, these metals will be negatively affected.
Platinum and palladium also plummeted last week. Platinum, losing -4.54% to settle at 1665.8, marked the deepest weekly decline since July 2009. Palladium was hit harder, plunging -8.2%, last week. The steeper correction was due to the stronger rally it had over the past months. Despite the decline, we remain bullish on the long-term fundamentals of PGMs. Note that redemption of PGM ETFs was minimal, suggesting investors are confident on the outlook.
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