Market sentiment waxed and waned last week as driven by news on debt
problems in both the Eurozone and the US. Commodities moved choppily
upward last week with gold breaking above 1600 for the first time on
record, signaling robust demand for safe-haven investment during times
of high uncertainty. Oil prices climbed higher erratically with optimism
in EU's deal and IEA's decision offsetting demand concerns.
The week began cautiously with investors fleeing to safe-haven assets
amid worries about the outcome of EU summit. Investors turned more
optimistic during the week after Germany and France had reached a joint
position on Greece's debt crisis ahead of the EU summit. They were even
thrilled as EU leaders delivered more than expected after the summit.
Sentiment was damped mildly after some economists criticized that the
funding size should been increased. EU finance ministers agreed on a new
bailout package for Greece. The total funding offered by the EU/IMF
will be 109B euro, an amount higher than the projected deficit of 103B
euro from 2011-2014. Involvement in private sector will be on a
'voluntary basis' and the net contribution is estimated at 37B euro.
Greece will have to accelerate implementation of fiscal consolidation
measures including privatization of Government assets worth of 50B euro.
Interest rates are lowered to 3.5%. Maturity of the loan, as well as
other loans from the EFSF in the future, will be extended 'from the
current 7.5 years to a minimum of 15 years and up to 30 years with a
grace period of 10 years'.
The leaders also reached a common position to enhance the importance
of ESFS, giving it the ability to buy Eurozone debts in secondary
markets. This, however, can only be done upon approval of the ECB and
under 'mutual agreement' of the EFSF/ESM member countries. The fund can
also give countries 'precautionary' credit lines and recapitalize
financial institutions through loans. The drawback is that there's no
increase in the size of the EFSF. This would limit the fund's
effectiveness to react swiftly, especially when the fund has no cash
buffer to act on the markets.
In the US, debates between Democrats and Republicans continued as the
August 2 deadline to raise the debt ceiling approaches. President
Barack Obama's support on the proposal by the 'Gang of Six proposal'
initially eased market concerns. Yet, the talk stalled and the situation
worsened as on Friday as Republican House Speaker John Boehner
announced to quit the negotiations abruptly.
News on Wednesday reported that the 'Gang of Six', a group of
senators composed of both Democrats and Republicans, proposed a 3.7
trillion debt-reduction plan which President Barack Obama described as
'broadly consistent' with what he has been looking for and 'a very
significant step' in reaching an agreement between the 2 parties. The
plan includes an immediate 500B in spending cuts, followed by bigger
reduction over the longer-term, as well as tax increase of 1 trillion.
The proposal also calls for lowering tax rates and limiting the growth
of entitlement programs. However, some democrats rejected the plan. The
debates within Democrats and between Democrats and Republicans continued
but no progress has been made so far on a closer deal.
With the Eurozone crisis temporarily contained, the focus for the
coming week will mainly be on US' debt ceiling. We continue to believe a
last-minute deal will be reached before the deadline and default will
be avoided. Moreover, the latest Beige Book will be released on
Wednesday. In Asia Pacific region, the RBNZ will meet for monetary
decision on Wednesday. It's widely expected policymakers will leave
rates on hold.
Energies:Apart from EU's new measures to stabilize
debt problems in peripheral countries, oil prices were also supported by
the IEA's decision not to release a second tranche of strategic
petroleum reserves for the time being. Yet, investors should not
consider IEA's release in June a one-off event. We believe it will
return should oil prices rise 'excessively' (e.g.: Brent above 120).
Some analysts forecast that the US government, as State elections
approach, may want to release more SPR to lower oil prices. Therefore,
the 'threat' of oil injection, same as the sovereign debt crisis in the
Eurozone, is only temporarily eased.
Natural gas reversed gains made in the prior week after rising to a
5-week high of 4.612 earlier in the week. The decline accelerated after
the DOE/EIA reported a bigger-than-expected rise in storage despite
hotter weather. Inventory increased +60 bcf to 2671 bcf in the week
ended July 15, Stocks were -213 bcf lower than the same period last year
less and -59 bcf below the 5-year average of 2730 bcf. Separately,
Baker Hughes reported US gas rigs added +4 units to 889 units in the
week ended July 22.
Precious Metals: After above 1600 and making new
all-time highs, gold is vulnerable to a correction in the near-term as
sovereign crisis in the Eurozone stabilizes. However, we retain the view
the metal will be supported by uncertainty in US debt ceilings in the
short-term, low interest rates and ongoing central bank buying in the
medium- to long-term. Others in the precious metal complex soared
following gold's suit but outperformed gold. Silver rose +2.69%,
platinum up +2.44% and palladium up +3.30%, compared with gold's +0.72%,
during the week. On industry news, Lonmin, the world's 3rd largest
platinum producer said it had produced 164K oz of platinum and 76K oz of
palladium in 2Q11, down -3% and -5% respectively from a year ago.
Platinum sales increased +24.7% y/y to 479K oz in the first 9 months of
the year. The company expects sales will reach 720K oz for the full
financial year to September, meaning around 240K oz more will need to be
sold. Lonmin reduced its sales target from 750K oz to 720K oz last
month after industrial action and safety work issue resulted in
production losses in South Africa.
source:Baker Hughes
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