Posts
Macroeconomic developments and related market sentiment continued to dominate the commodity market. Earlier in the week, US Treasury Secretary Timothy Geithner reiterated the 'strong dollar' mandate while People's Bank of China surprisingly raised both the deposit rate and lending rate by +25 bps. The moves pressured commodities. Prices fluctuated throughout the week as speculations for QE remained but some investors, as the November FOMC meeting approaches, worried that easing measures announced by the Fed would be milder than previously expected.
Finance ministers said, after the G-20 meeting in South Korea, that countries agreed to 'move towards more market determined exchange rate systems that reflect underlying economic fundamentals and refrain from competitive devaluation of currencies'. Meanwhile, the G-20 also agreed to strengthen the IMF's role in managing the world economy and to allocate more voting rights to emerging markets. According to IMF Managing Director Dominique Strauss-Kahn, policymakers agreed on a 'biggest reform ever' as, in order to increase the role of emerging markets, Europe will surrender 2 seats on the on IMF's 24-member executive board and a majority of countries will shift more than 6% quotas to under- represented countries.
World financial leaders have been striving to ease currency tensions stemming from global economic imbalances. Gold may fall in the coming week as the 'joint agreement' signals policymakers' determination to ease tensions. Yet, we doubt if the effectiveness of these efforts and remain bullish for the gold in the long-term.
Crude oil moved in a volatile range, showing little direction, last week with the WTI contract for December delivery ending the week -0.29% lower. Oil prices rebounded on Friday amid news that France is importing a large amount of fuel and using reserves to meet the market demand. We believe the impact of French labor action on US oil supplies would be small given ample stockpiles in the US.
Strikes, protests and demonstrations in France in opposition to a government bill to raise the age for a minimum pension from 60 to 62 have caused shutdowns of oil refineries and led to fuel shortages. According to French Energy Minister Jean-Louis Borloo, the country is importing 120K cubic meters of fuel a day and has 7M cubic meters of fuel reserves. Refinery disruption in France has raised concerns about oil supply to the US as France is the 4th largest gasoline exporter to Europe and a key exporter to the US. Indeed, the impact would be limited, as the US has ample fuel supplies, unless labor actions persist for a long period of time.
The US imported 12.602M bpd in July 2010, of which only +0.26% was from France. Considering Europe as a whole, the regions exported +16.7% of gasoil/diesel to the US in 2Q10 while exports of jet/kerosene were insignificant. Meanwhile, fuel stockpiles in the US remain ample with both gasoline and distillate inventories staying markedly above 5-year average. We believe the temporary disruption in France should not have much impact on the US market.
Tropical Storm Richard may be another support for oil prices. The US National Hurricane Center Tropical Storm said Richard gained strength and 'most of the intensity models respond to this by intensifying Richard into a hurricane'. Yet, meteorologists do not think it would threaten oil facility in the Gulf of Mexico. Therefore, any lift on prices will be short-lived.
Gas slumped as storage soared +93 bcf to 3683 bcf in the week ended October 15. Stocks were -48 bcf below the same period last year and +286 bcf, or +8.4%, above the 5-year average of 3397 bcf. Increase in gas storage has accelerated since mid-September, indicating a bearish outlook for demand/supply balance. Yet, demand may improve later in the year as price has plummeted to a level that should encourage using gas as a substitution for coal.
Gold contracted for the first time in 6 weeks as USD rebounded. The benchmark contract plummeted to 1315.6, the lowest level in more than 2 weeks, before settling at 1325.1, down -3.42%. The G-20 meeting over the weekend and the FOMC meeting in early November would be key catalysts for gold's outlook in coming weeks.
As we mentioned before, the long-term outlook for gold remains bullish despite near-term corrections as currency tensions, QE from central banks and sovereign crisis in peripheral European economies are factors supporting the uptrend.
The yellow metal has been rallying over the past several weeks as speculations for Fed's return to QE weakened the dollar. As the FOMC meeting approaches, the market began to worry that easing measures announced by policymakers may be less aggressive than the market has priced in. This was a reason for the dollar's rebound last week. In fact, we believe both situations - aggressive QE and mild QE- would be gold-positive.
If the Fed announces measures that exceed market expectations, the dollar will be under tremendous pressure. While weakness in USD benefits gold, capital inflows for gold as an inflation-hedge will also surge. If the central bank disappoints the market by beginning the QE will only a small amount, the dollar may rebound temporarily. However, investors will soon price in more downside risks for US' economic recovery and this should again spur gold purchase as a safe-haven asset.
Failure to test $25 led to a sharp fall in silver price. Over the week, the benchmark contract dived -4.82% and was the worst performer in the commodity sector. Yet, the decline was insignificant compared with the lucrative +36.5% rally since the beginning of the year.
Following gold's suit, silver surged amid speculations of Fed's QE. The 'poor people's gold' has stayed at elevated levels after making a new 30-year high last week. AT the same time, the gold /silver ratio has dropped to 56.13, the lowest level in more than 2 years, signaling silver's outperformance to gold. Investors to be cautious about a deep correction as it's uncertain how long investment demand can support silver's rally as growth in supply has been outpacing that of demand.
Although unexpected rate hike in China triggered profit-taking, recovery was seen later in the week as sentiment remained positive for the complex. Yet, due to divergence in fundamental outlook, price movements of individual metals differed.
Launch of physically - backed ETF on base metals has recently been a hot topic and impacts on the demand/supply outlook have been widely discussed. Aluminum will likely be the first industrial metal ETF in the market. We expect an ETF should help eliminate the huge aluminum stockpile and lend support to price.
That said, launch of physically-backed ETF is not without risk. For example, notional storage costs for the base metals are much higher than for precious metals. Moreover, the cost of storage built into a physically-backed ETF will make it underperform that of an index-linked ETF. As a physically-backed ETF increases demand and raises the price of a certain metal, higher metal price may induce substitution and eventually deteriorate the fundamental of that metal.
No comments:
Post a Comment