Commodities' slump accelerated in NY session Friday as unexpected contraction in non-farm payrolls exacerbated worries over economic and demand recovery. USD's rally against the euro, the pound and high-yield currencies exerted additional pressure on commodities.
Although the European Commission showed support to the Greek government's 3-year plan to reduce budget deficit, whether it can be successfully implemented remains a question mark! Unions in Greece are opposing the plan and have decided to strike in mid-February. In fact, the market generally expects Greece will eventually need financial support from outside sources, such as EC or the IMF.
While the Greek issue is far from being resolved, there are signs of contagion to other peripheral European economies. Spreads 5-year credit default swaps (CDS) between Greek and German bonds widened significantly and we are seeing similar trends in CDS of Spain, Hungary Portugal, etc. Contagion is a serious problem in the Eurozone economy as it suggests around 20-30% of the region's economy is at risk.
The dollar index surged for a 4th consecutive week, by +1.23%, to 80.44 last week. Against individual currencies, USD surged +2.31%, +1.93%, +1.94% and +1.44% against GBP, AUD. NZD and EUR, respectively. The Reuters/ Jefferies, CRB Index lost -2.65% to 258.55.
Crude Oil
WTI crude oil broke below 70 to 69.5, the lowest level since December 15, before closing at 71.19 Friday. The benchmark contract lost -2.7% on a single day and -1% over the week. The correction from the 15-month high at 83.95 (January 11, 2010) has erased the gains made from the rally in mid-December.
In the absence of changes in fundamental outlook, the sharp fall over the past 3 days was driven by risk aversion. Investors worried that deficit issues in some Eurozone countries will evolve to sovereign credit crisis. In case of bailouts, economy of the entire 16-nation Eurozone will be affected.
Weakness in the US employment report hurt market confidence further. Non-farm payrolls plunged -20K in January, compared with consensus of -20K addition. December's change was revised down to -150K. Unemployment rate dropped to 9.7% from 10% in December. However, this was due to decline in labor force participation.
Take a look again in the fundamentals. The US Energy Department reported Wednesday that crude oil inventory rose +2.32 mmb (consensus: +0.4 mmb) to 329 mmb in the week ended January 29. For oil products, gasoline stockpile dropped -1.31 mmb, similar to market expectation, to 228.1 mmb and distillate stockpile fell -0.95 mmb to 156.5 mmb. Utilization rate, at 77% last week, stayed at abnormally low levels in 4Q09 and early 2010. These used to be ramping-up seasons for refiners.
The major problem of low refinery utilization is lack of demand and ample inventory. The charts below show that gasoline stockpile has been staying consistently above 5-year average since the second half of 2009 despite modest recovery in economic outlook. Dislocation of distillate inventory from historical level is even a more serious problem. Concerning demand, both fuels are showing contraction on annual basis.
After the several selloff last week, crude oil price movement may stabilize and recover in the coming week. However, it's unlikely for oil to rise above 80 unless oil demand, including gasoline and distillate, show sustainable recovery.
Precious Metals
The complex tumbled in tandem with others in the commodity complex as strength in USD curbed demand. Among the 4 metals under our coverage, silver dived -8.4%, the worst performer of the week, to 14.83. Investors dumped silver amid concerns that slowdown in global economic recovery will cripple silver consumption. Capitals have seen flowing out of silver ETF since late 2009.
While PGMs are also highly exposed to industrial activities, price correction is contained by strong investment for the newly launched ETFs in NYSE. Moreover, the demand/supply outlook for PGMs is more prominent than that for silver.
The benchmark contract for gold slid -2.86% to 1052.8. Movement of gold has demonstrated high, but inverse, correlation with real interest rate. The pattern was particularly consistent in the second half of 2009. However, drastic change was seen in mid-January, when the euro dived against the dollar and Japanese yen because sovereign credit crisis in Greece escalated.
In the long-term, we are bullish on gold's outlook. We believe the yellow metal will move back to its traditional pattern with real interest rate and the Fed is not likely to hike rates any time soon, at least until 4Q10.
However, downside risk remains in the near-term as USD will likely strengthen further as long as worries about sovereign defaults in peripheral European nations persist. Although we do not see USD a safe asset as the US itself is facing huge budget deficits and recommend investors to accumulate gold, it's market sentiment, which views selling commodities and buying low/no-yield assets such as USD and JPY as safe strategy, that dominates. Therefore, it's likely for gold to weaken further.
Base Metals
Prices slumped across the board last week, losing 4-10%, as higher-than-expected jobless claims and surprising contraction in non-farm payrolls heightened concerns over US job markets. At the same time, USD's rally because of debt problem in the Eurozone reduced demand for the metals.
Against the backdrop of Chinese tightening, robustness in manufacturing PMI has recently been viewed as impetus to the government's cooling actions. Therefore, positive response, if any, to strong PMI was short-lived. However, the fact that PMI data were strong across the board (US, Europe and Asia) signaled a turnaround of manufacturing/industrial sector worldwide.
Although the European Commission showed support to the Greek government's 3-year plan to reduce budget deficit, whether it can be successfully implemented remains a question mark! Unions in Greece are opposing the plan and have decided to strike in mid-February. In fact, the market generally expects Greece will eventually need financial support from outside sources, such as EC or the IMF.
While the Greek issue is far from being resolved, there are signs of contagion to other peripheral European economies. Spreads 5-year credit default swaps (CDS) between Greek and German bonds widened significantly and we are seeing similar trends in CDS of Spain, Hungary Portugal, etc. Contagion is a serious problem in the Eurozone economy as it suggests around 20-30% of the region's economy is at risk.
The dollar index surged for a 4th consecutive week, by +1.23%, to 80.44 last week. Against individual currencies, USD surged +2.31%, +1.93%, +1.94% and +1.44% against GBP, AUD. NZD and EUR, respectively. The Reuters/ Jefferies, CRB Index lost -2.65% to 258.55.
Crude Oil
WTI crude oil broke below 70 to 69.5, the lowest level since December 15, before closing at 71.19 Friday. The benchmark contract lost -2.7% on a single day and -1% over the week. The correction from the 15-month high at 83.95 (January 11, 2010) has erased the gains made from the rally in mid-December.
In the absence of changes in fundamental outlook, the sharp fall over the past 3 days was driven by risk aversion. Investors worried that deficit issues in some Eurozone countries will evolve to sovereign credit crisis. In case of bailouts, economy of the entire 16-nation Eurozone will be affected.
Weakness in the US employment report hurt market confidence further. Non-farm payrolls plunged -20K in January, compared with consensus of -20K addition. December's change was revised down to -150K. Unemployment rate dropped to 9.7% from 10% in December. However, this was due to decline in labor force participation.
Take a look again in the fundamentals. The US Energy Department reported Wednesday that crude oil inventory rose +2.32 mmb (consensus: +0.4 mmb) to 329 mmb in the week ended January 29. For oil products, gasoline stockpile dropped -1.31 mmb, similar to market expectation, to 228.1 mmb and distillate stockpile fell -0.95 mmb to 156.5 mmb. Utilization rate, at 77% last week, stayed at abnormally low levels in 4Q09 and early 2010. These used to be ramping-up seasons for refiners.
The major problem of low refinery utilization is lack of demand and ample inventory. The charts below show that gasoline stockpile has been staying consistently above 5-year average since the second half of 2009 despite modest recovery in economic outlook. Dislocation of distillate inventory from historical level is even a more serious problem. Concerning demand, both fuels are showing contraction on annual basis.
After the several selloff last week, crude oil price movement may stabilize and recover in the coming week. However, it's unlikely for oil to rise above 80 unless oil demand, including gasoline and distillate, show sustainable recovery.
Precious Metals
The complex tumbled in tandem with others in the commodity complex as strength in USD curbed demand. Among the 4 metals under our coverage, silver dived -8.4%, the worst performer of the week, to 14.83. Investors dumped silver amid concerns that slowdown in global economic recovery will cripple silver consumption. Capitals have seen flowing out of silver ETF since late 2009.
While PGMs are also highly exposed to industrial activities, price correction is contained by strong investment for the newly launched ETFs in NYSE. Moreover, the demand/supply outlook for PGMs is more prominent than that for silver.
The benchmark contract for gold slid -2.86% to 1052.8. Movement of gold has demonstrated high, but inverse, correlation with real interest rate. The pattern was particularly consistent in the second half of 2009. However, drastic change was seen in mid-January, when the euro dived against the dollar and Japanese yen because sovereign credit crisis in Greece escalated.
In the long-term, we are bullish on gold's outlook. We believe the yellow metal will move back to its traditional pattern with real interest rate and the Fed is not likely to hike rates any time soon, at least until 4Q10.
However, downside risk remains in the near-term as USD will likely strengthen further as long as worries about sovereign defaults in peripheral European nations persist. Although we do not see USD a safe asset as the US itself is facing huge budget deficits and recommend investors to accumulate gold, it's market sentiment, which views selling commodities and buying low/no-yield assets such as USD and JPY as safe strategy, that dominates. Therefore, it's likely for gold to weaken further.
Base Metals
Prices slumped across the board last week, losing 4-10%, as higher-than-expected jobless claims and surprising contraction in non-farm payrolls heightened concerns over US job markets. At the same time, USD's rally because of debt problem in the Eurozone reduced demand for the metals.
Against the backdrop of Chinese tightening, robustness in manufacturing PMI has recently been viewed as impetus to the government's cooling actions. Therefore, positive response, if any, to strong PMI was short-lived. However, the fact that PMI data were strong across the board (US, Europe and Asia) signaled a turnaround of manufacturing/industrial sector worldwide.
