Financial markets had another volatile week as economic data in the
US and renewed sovereign debt concerns in the Eurozone continued to
shake confidence. Earlier in the week, risk appetite was boosted by
better-than-expected US retail sales and Japan's GDP data. M&A news
(Google's purchase of Motorola Mobility) sent stock prices higher and
in turns boosted risky assets. Sentiment turned sour again in the
middle of the week and deteriorated further on Thursday with stocks,
commodities (except for gold) and higher-yield currencies facing
another big selloff amid disappointing US data. While
weaker-than-expected initial jobless claims, housing data and
manufacturing index gave further signals that the country may have a
double-dip recession, rising inflation pressures indicated it's getting
more difficult for the Fed to implement measures to stimulate growth.
The Franco-German meeting failed to come up with solutions to settle
the debt crisis. Leaders of biggest economies in the 17-nation region
proposed to create a 'true European economic government' which will
eventually lead to a common tax and fiscal policies within the
Eurozone. Concerning fiscal issues, Germany and France will create a
common corporate tax base and tax rate between the 2 countries from the
start of 2013. Moreover, they will propose in September the imposition
of a new financial transaction tax across all Eurozone members. While
the details of the types of taxes were not provided, investors were
obviously irritated by the financial transactions tax as the euro and
equities plunged after the announcement.
The ECB said that it has recently lent US$ 500M in its 7-day
liquidity-providing operation to a bank at above market rates. This was
the first time since February that the facility was used. Fears that
more banks will seek ECB's funding because of their heavy exposure to
debts of Greece and other debt-ridden countries increased and would
make the market outlook negative. Concerns over contagion of Eurozone's
sovereign crisis have spread to the US. The WSJ said that US regulators
are taking a closer look at the US units of Europe's biggest amid
concerns that the region's debt problems will spread to the US banking
system. The report said that the New York Fed is 'very concerned' about
the issue and has been seeking information about the banks' ability to
access funds to maintain their US operations. New York Fed President
Dudley denied the officials are watching a particular group of banks
closely and reiterated that the central bank treats US and European
banks 'exactly the same' and is 'always scrutinizing banks'.
Tremendous uncertainties in the economic outlook and banking system
in both sides of the Atlantic will persist for some time. Investment
banks such as Citigroup and JP Morgan downgraded their forecasts on US
growth while Morgan Stanley trimmed its global growth outlook, warning
the US and Europe are 'dangerously close to recession'. We expect
financial markets will remain fragile in coming weeks.
Crude Oil: The front-month contract for WTI crude
oil erased gains made earlier in the week amid worries over US
recession. The selloff was exacerbated by the unexpected stock-build.
Crude stockpile surprisingly rose +4.23 mmb, to 353.98 mmb as stocks in
Gulf Coast surged a huge +6.26 mmb in the week ended August 12. Brent
crude was strong despite a similar trend as disruption in the North
Sea, Nigeria and Libya supported price. The front-month contract ended
the day gaining +0.55%.
Nymex natural gas slipped with price plunging to a 5-month low of
3.843 Thursday before settling at 3.94 Friday. The benchmark contract
lost -2.96% on weekly basis. According to the DOE/EIA, gas storage
climbed +50 bcf (consensus: +48 bcf) to 2833 bcf in the week ended
August 12. Stocks were -175 bcf below the same period last year and -73
bcf, -2.5%, below the 5-year average of 2906 bcf. As far as rig count
is concerned, Bake Hughes reported that the number of gas rigs rose +4
units to 900 in the week ended August 19. Oil rigs added +11 units to
1066 and miscellaneous rigs remained unchanged at 8 units, sending the
total number of rigs to 1974 units during the week. Directionally
oriented combined oil, gas, and miscellaneous rigs fell -13 units to
227, while horizontal increased +15 units to 1138 and vertical
increased 13 units to 609.
Precious Metals: With the exception of palladium,
all commodities under our coverage jumped during the week. Silver was
the best performer, followed by gold and platinum. The strength of
these precious metals was attributed to the slowdown in global growth
outlook, large fiscal deficits, low interest rate-environment in
developed countries, heightening inflationary pressures and political
and economic uncertainties. The issues, despite governments'
resolutions, will persist (low interest rate-environment will persist
for several years) and will continued to support the precious metal
complex for some time.
Gold price surpassed platinum price earlier in the month for the
first time since December 2008 as demand for safe-haven assets drove
investors to the yellow metal from risk assets. In 2008, gold price
exceeded that of platinum four times (December 12, 15, 17, 18) and we
would not be surprised to see gold trade above platinum more
sustainably this time.
While both metals are categorized as precious metals, industrial demand
makes up over 80% of total platinum demand (with autocatalytic demand
taking up more than one-third of total demand) but it only accounts for
around 10% of total gold demand. The 'industrial' characteristic in
platinum makes its price movement more synchronized with stocks, oil
and other 'higher risk assets'. Therefore, it tends to lose its glitter
to gold during economic turmoil and uncertainty. On the contrary, gold
is often considered as a store of value and a hedge against inflation.
It's especially attractive when global central bankers are competing to
devalue their countries' currencies so as to stimulate growth.
World Gold Council released its latest gold demand trend last week.
According to the council, total global demand fell in 2Q11 fell -17%
y/y in volume terms but increased +5% in value terms. Strong growth in
jewelry was offset by a drop in investment demand, especially from ETF
and similar products. We believe the apparently underperformance in ETF
investment was due to high base effect as ETF demand in 2Q10 was the
second large one on record.
Geographically, Indian and Chinese demand grew +38% and +25%
respectively in 2Q11 from the same period last year. World Gold Council
expects the growth to continue in the second half of the year, thanks
to 'increasing levels of economic prosperity, high levels of inflation
and forthcoming key gold purchasing festivals'. Other factors
supporting gold demand in 2H11 include sovereign debt problem in the
Eurozone, downgrading of US debts, inflationary pressures and the for
economic growth outlook in developed countries. These factors will
continue to support official sectors in remaining net purchasers of
gold and are all likely to 'drive high levels of investment demand for
the foreseeable future'.
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