Sentiment Sours ahead of US GDP

ONG Focus | Insights | Written by Oil N' Gold | Fri Oct 29 10 07:07 ET

Investors lightened positions ahead of US GDP report and next week's FOMC meeting. Risk aversion dominates the market as the pace of US recovery is not sufficient to reduce unemployment and bring inflation back to a normal level. USD and JPY are being sought. The euro tumbled as sovereign concerns in peripheral European economies remained worrisome. Commodities fall in European session with WTI crude oil price sliding to as low as 81.4 and gold remaining pressured below 1350.

US GDP probably expanded at a +2.2% annualized pace in 3Q10 as driven by growth in consumer spending, business investment and inventory growth. While this would be an improvement from +1.7% in 2Q10, the pace of recovery remains gradual and unsustainable. It's likely that the unemployment rate will stay around 10% for some period with such slow economic growth.

The market has fully priced in new QE measures - large-scale asset purchases- from the Fed next week. Yet, there have been heated debates on the size and time of the program. There are several possibilities that policymakers will choose to begin the program: 1) To buy $500B or more in longer-term Treasury over a period, say 6 months. 2) To buy $100B per month with re-evaluation of the program on every FOMC meeting. There's an implication that the purchase will continue until some sorts of improvement are seen in the economy. 3) To buy $50B or less every month. Ultimately, total purchase would amount to $1-2 trillion in all 3 scenarios. Apart from the asset-buying program, the Fed may adopt new communication strategies in ensuring the market that exceptionally low interest rates will be kept for an extended period. More importantly, the Fed will give a clearer idea on what ‘extended period' mean.

Euro's decline amid sovereign concerns in debt-ridden European economies weighed on gold in the near-term. The woes resurfaced as the Portuguese government failed to approve a debt-consolidation plan. In other peripheral nations, Greek Finance Minister George Papaconstantinou the country has ‘serious tax compliance issues and a review of Greece's 2009 Budget showed the deficit was above +15% of GDP, exceeding previous projections. In Ireland, note holders of Anglo Irish Bank Corp plan to oppose a debt exchange worth 20% of their 1.6B euro of securities. Spreads between peripheral bonds and German bunds widened.

Economic data released in the 16-nation region failed to alter euro's outlook in the near-term. Unemployment rate stayed flat at 10.1% while flash CPI reading rose +1.9% y/y (consensus: +1.7%) in September from +1.8% a month ago.

 

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