Commodities Recover after Selloffs but Near-term Risks Remain

ONG Focus | Insights | Written by Oil N' Gold | Wed Nov 24 10 00:48 ET

Market sentiment remained fragile in Asian session today despite mild recovery in most assets after yesterday's selloffs. The focus yesterday was intensified tensions on the Korean Peninsula. The attack was described as catastrophic and the most serious incident in the region after the Korea war. Geopolitical tensions drove investors to safe-haven assets and therefore we saw rally in US dollar and gold. Worse still, sovereign crisis in peripheral European economies remained worrisome even after Ireland requested bailout. Political chaos in Irish government raised concerns that the budget plan may not be passed. 2 days after Moody's warning of a multi-notch downgrade of Ireland's credit rating, S&P lowered its rating on the country by 2 steps with a negative outlook. In the commodity sector, gold was probably the best performer with the benchmark contract rising to a 2-week high of1382.9 before closing at1377.6, up +1.46%. Crude oil price plunged with the front-month WTI contract slumping to as low as 80.28 before ending the day at 81.25, down -0.60%.

South Korean President Lee Myung-bak called the shelling of a South Korean island by North Korea as "an invasion of South Korean territory". South Korea fired back and scrambled F-16 fighter jets. Lee believed ‘enormous retaliation is going to be necessary to make North Korea incapable of provoking us again'. Elevated tensions between North and South Korea have caught international attention. UN Secretary General Ban Ki-moon condemned the attack, calling it ‘one of the gravest incidents since the Korean War' while Russia's Foreign Minister Sergei Lavrov said there's ‘a colossal danger' and ‘it is necessary to immediately end all strikes'.

Tensions between the 2 Koreas have intensified from time to time. Yeonpyeong Island, the area where the shelling was directed, is near the disputed border between the 2 countries. Naval skirmishes occurred near the area in 1999 and 2002 has also triggered a short-term rally in gold price. In March 2010, a South Korean warship sank and killed 6 sailors around the area. Gold price also surged as North Korea's denial of responsibility tensions intensified tensions between the 2 countries.

Just 2 days after Moody's warning of a multi-notch downgrade of Ireland's credit rating, S&P lowered its ratings on the country by 2 steps with a negative outlook. According to the rating agency, Ireland's long-term sovereign rating is reduced to A from AA- while the short-term grade to A-1 from A-1+ as ‘the Irish government looks set to borrow over and above our previous projections to fund further bank capital injections into Ireland's troubled banking system'. The rating is now on “CreditWatch with negative implications', suggesting further downgrades cannot be ruled out should the situation deteriorates.

It's hard to identify whether gold's rally was driven by the Korean incident or sovereign woes in the Eurozone. However, simultaneous strength in gold and the dollar indicate that risk aversion is high. Although oil and other growth assets recovered today, we believe these are only technical rebounds after the sharp selloffs yesterday. We advise caution on the near-term outlook.

 

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Near-term Negative Sentiment Remains amid Doubts of QE Effectiveness, European Debts

ONG Focus | Insights | Written by Oil N' Gold | Tue Nov 16 10 00:56 ET

The near-term outlook for commodities remains vulnerable. Economic data released in the US yesterday depicted a mixed picture for economic recovery. Worse still, criticism about Fed's QE intensified with some finance officials doubting the effectiveness of the measures to revive growth. Sovereign concerns in peripheral European economies remained under the spotlight. Signs that Ireland will seek assistance from the EU would only calm the market in the short-term. Indeed, Portugal and Spain are also in dangerous positions and may be the next to tap external funds. Despite a brief rebound to 85.77, the front-month contract for WTI pared gains and ended the day flat at 84.86. Gold price remained in consolidative mode with price hovering with a range of 1350 and 1380. Strength in the dollar has limited the upside.

Risk assets, including commodities, were boosted after release of better-than-expected US retail sales in October. The reading jumped +1.2% m/m in October, compared with +0.7% as forecast and +0.6% in September. Sales excluding auto gained +0.4%, same as consensus and September's reading. However, optimism was wiped out as the Empire State manufacturing Index contracted, for the first time in more than a year, to -11.1 in November from 15.7 a month ago. This signaled that expansion in the manufacturing has stalled.

While the market had anticipated Fed's new round of QE measures may help revive growth, Richmond Fed President Jeffrey Lacker said the central bank may need to begin tightening in the 'not-too-distant future' to curb inflation even though 'the unemployment rate is still relatively high by historical standards'. Meanwhile the Wall Street Journals reported that group of Republican-leaning economists will launch a campaign this week calling on the Fed to drop the $600B plan to buy Treasury bonds as 'the planned asset purchases risk currency debasement and inflation' The group does not think the measures will 'achieve the Fed's objective of promoting employment'.

The dollar rebounded, partly as risk appetite diminished and partly as the Fed will face more hurdles in implementing further QE measures.

On the other side the Atlantic, the Eurozone continued to be stricken by sovereign concerns. News said Ireland may eventually request financial assistance from the EU. While this may help the country from going bankrupt, the long-term fiscal problems in peripheral European economies remain unresolved. Eurostats officially lifted its estimate of Greece's deficit to 15.4% of GDP from 13.9% in 2009, surpassing Ireland's 14.4%. Meanwhile, the debt was revised to 126.8 % of GDP, overtaking Italy at 116%. Greece is now the largest budget deficit nation in the Eurozone. The government said the country will reduce the budget deficit to 9.4% of GDP and debt to 144% GDP this year. While this signaled a miss of target made earlier this year (deficit to 7.8% in 2010 and 7% in 2011), the government reiterated the target to bring the shortfall within 3% of GDP by 2014.

 

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