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The dollar's rebound stalled as risk appetite increased after initial jobless claims data dropped -22K to 435K, compared with consensus of 450K, last week. This upstaged sovereign concerns in Ireland and a rise in China's RRR. Treasuries rose after the Fed announced to buy $100B of bonds during the next 30 days and the 30-year bond auction was completed. Fed's plan reminded us of its committed participation in the market. Commodities were pressured initially as the dollar rebounded, loss were pared later in the NY session as US' recovery lost steam. The front-month contract for WTI crude oil jumped to a new 2-year high of 88.21 before settling at 87.81, up 1.26%. An unexpectedly bullish inventory report has helped the rally.
A tug of war between bulls and bears was seen in gold trading. The rally after Fed's QE2 announcement has sent the metal above 1400. While factors such as China's RRR hike, margin changes in silver futures and overextended rally justify a correction in the near-term, persistent currency tensions and sovereign crisis in peripheral European economies should keep gold supported. We expect gold will remain in consolidation these few days.
Investors remained unnerved although Irish central bank Governor Patrick Honohan reassured the country will go back to the bond market next year. Honohan said that the budget plan, including 6B euro in spending cuts and tax increases for 2011, is a 'credibly convergent path' and 'a good basis for rebuilding confidence'. These comments failed to ease market worries and Irish 10-year yields surged to a new high of 8.6% amid expectations that the plan will not be approved. Portuguese bond yields also rose as the likelihood of a bailout by the European Financial Stability Facility has also increased.
Fed's new round of easing has driven capital flows to higher-yield investments in emerging markets. In order to curb excessive liquidity from overseas, China has recently stepped up control measures. Yesterday, the People's Bank of China announced its first national increases in reserve requirement ratio for banks. The percentage of amount lenders have to set aside is increased by 0.5%. The move triggered declines in stocks currencies and commodities.
It's increasingly likely that easing measures from advanced economies will result in protectionism. International disputes regarding trades and currencies should last for a prolonged period of time. We believe the situation is positive for gold for it is a traditional safe haven and a tool for portfolio diversification.
World Bank President Robert Zoellick clarified his comments on gold standard. While Zoellick said he doesn't believe we can return to gold standard, he said 'markets are already using gold as an alternative monetary asset because confidence is low. Policymakers need to consider this as an indicator about how markets are viewing their policies'. We believe his comments help justify recent rally in gold and indicate that the metal's strength should be well-supported as long as world central bankers continue to employ existing monetary policies.
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