Gold Jump starts June

Weak manufacturing data from China has increased concerns on the world’s fastest growing economy. Investor sentiments weakened further and led to downside pressure on Asian equities in today’s trading session. US equities also ended lower in yesterday’s trade on the back of poor economic data that suggested the US economy was still on a slow growth trajectory amid the heightening European economic crisis.

The US Dollar Index (DX) has strengthened 5.5 percent in the month of May and this strength in the currency is not due to an improving US economic scenario, but is a result of weakness in the Euro due to the unresolved debt crisis. In yesterday’s trade, the currency closed in the green as weak equities coupled with low risk appetite supported demand for the low-yielding dollar.

The fall in the Euro continued on Thursday but the currency recovered from its lows on reports that the International Monetary Fund (IMF) is in process to think of measures or a bailout package for Spain.

As expected this week, gold futures were really well contained by the stiff range we mentioned, from $1520-1600 so far although massive volatility was there within the defined range. Today morning the weakness is again felt at the Globex dogged by a fresh Spanish discomfort and that raised the call for external aid to settle a ruined financial condition. The Euro has condensed to a sharp sell-off by the record widened yield spread between Spanish-German bonds. The Euro therefore exhibits further potential downside and may take gold along the ride. Asian equities sank followed from the bleak US releases and the disappointed Chinese manufacturing release in early morning. Market would have been waiting for the mostly eyed nonfarm payroll data due later today. After the indication from ADP yesterday, the lackluster growth in jobs is expected in private sector as well. Any disappointment in today’s report may further damp the market sentiment but it could be a supportive factor for gold to draw refuge from the slumping economic sentiment. However, personal income may increase as the unit labor cost rose while spending may drop as the closely followed index of consumer confidence fell for the third straight month in May to the lowest level in five months.

Overall, the US releases seem to be blend which might create bit volatility in today’s session. But before that, as we discussed, gold may ride along the wobbled Euro. Hence, the Asian and European hours may see gold trading at a lower note; while in the evening a slight weakness in nonfarm may fuel the metal’s price as a haven. Said above, we recommend staying short for the metal till the US starts after which we need to be cautious for the data release.

Silver futures prices are also trading down be almost half a percent at the Globex. The Asian equities sank, taking cues from the US shares and a bleak picture drawn by the economic releases yesterday. Also, the early morning manufacturing release from China also created pressure on the equities. The Euro again came down as the record widened yield spread between Spanish-German bonds created sharp sell offs in the shared currency. We therefore expect silver too to remain weak for the day. However, US nonfarm payroll has to be watched keenly. Especially after the ADP data disappointed yesterday, we may be conservative in our estimation for job addition. Even if there is some addition, it would not be huge enough. So, this may be a fuelling factor for silver price in today’s session.

 

A Quick Look at the Financial Markets

Worries over Europe have heightened especially keeping Spain and Italy in mind and due to this risk aversion has hit the global financial markets, leading to a downside pressure in Asian equities. In yesterday’s trade, US equities also ended lower with the Dow Jones and the S&P 500 losing more than 1 percent each.

Bond yields in Spain and Italy increased, and at the same time uncertainty with respect to Greece continued. The yield on the 10-year Spanish government bond increase 22.2 basis points to 6.685, while yields on Italy’s government bond raised 17.4 basis points to 6.068 percent. 

US Pending Home Sales declined by 5.5 percent in April from previous rise of 3.8 percent a month ago. This further added to weakening sentiments in the global markets.

The US Dollar Index (DX) strengthened in yesterday’s trade on the back of rising risks associated with the European economic crisis. With Spain and Italy coming under the radar amid the already existing Greek concerns, investors are not getting a breather. Also, the US economy is fairly at a better economic state of affairs and the DX is thus inviting investors due to rising volatility in the Euro. 

Approaching the lowest level in almost two years against the dollar, the Euro continued to remain under pressure in yesterday’s trade. Concerns hit the markets that the European debt crisis was spreading to the region’s major economies and this led to fear of further economic problems.

European M3 Money Supply increased at slow pace of 2.5 percent in April as against a rise of 3.1 percent a month ago. Private Loans rose at slow pace of 0.3 percent in April from 0.6 percent in March. Retail PMI increased by 2 points to 43.3-level in May compared to 41.3-mark in last month.

Spot gold prices increased 0.4 percent yesterday as buying emerged at lower levels during late trade yesterday as the yellow metal tested a low of $1531/oz.  However, strength in the DX restricted further upside in gold prices. The yellow metal touched an intra-day high of $1569/oz and closed around $1562/oz in yesterday’s trading session.

Nymex crude oil prices declined more than 3 percent yesterday on the back of unfavorable economic data from the US, which led to expectations of reduction in fuel demand. Additionally, strength in the DX also exerted downside pressure on crude oil prices. It touched an intra-day low of $87.27/bbl and closed at $87.82/bbl in yesterday’s trading session.

As per the American Petroleum Institute (API) report last night, US crude oil inventories declined unexpectedly by 0.3 million barrels to 385.90 million barrels for the week ending on 25th May 2012.

Due to the US holiday on Monday, The US Energy Department (EIA) is scheduled to release its weekly inventories report today and US crude oil inventories are expected to rise by 0.6 million barrels for the week ending on 25th May 2012

Spain Takes Center Stage

The market is likely to remain volatile on account of global cues especially uncertainty regarding Greece. Absence of any positive trigger coupled with policy paralysis holding back the markets to form a rally. Markets are likely to remain under pressure until the Greece issue is resolved or some actions have been taken on the government’s part.

Greece’s inability to form a Government, which led to the country calling another election in June, has raised concerns about its ongoing membership of the euro zone and the health of the European economy. Greece has put a senior judge in charge of an emergency government to lead the nation to its second election in just over a month on June 17, which will likely determine whether it remains in the common currency area.

The euro touched a 23-month low today as fears mounted that Spain’s banking woes will push its borrowing costs to unsustainable levels while signs merged that China may move cautiously on stimulus measures to bolster its economy. Indications that China may take a cautious approach to stimulating its economy as growth weakens also dampened sentiment in the markets.

Spain’s sovereign credit rating was cut by Egan-Jones Ratings Co. to B from BB- on the country’s deteriorating economic outlook.  Earlier this week the country’s central bank said the economy will sink deeper into recession.

Focus on the shifting plans to recapitalize Bankia, the general escalation in the European crisis, the complication for Spanish funding as bond yields and CDS levels jump higher and China’s attempt to dampen speculation over its stimulus plans throw markets back into risk aversion, driving weak equity and commodity markets and a strong USD. There was some relief on headlines that the EU is willing to envisage direct ESM bank recapitalization and supports Eurobonds but this faded.

Markets were delivered a one-two punch late yesterday and overnight.  It started with the ECB decision following the North American close that it would not fund the recapitalization of Spain’s Bankia group. Facing few options, Spain then went on to confirm that it would fund recapitalization through more debt issuance.  Spanish 10s reacted by sharply selling off and sit at the increasingly dangerous 6.7% mark.

Spanish bonds have declined quite sharply since the past several days and the previous session was no exception either, as spread between the 10-year Spanish yields relative to benchmark German bunds widened the most since the Euro was created.

The yield spread against 10-year German bunds widened to more than 500 basis points, a record high, as concerns grew that Spain’s lenders will need additional financial support to weather Europe’s debt crisis. Meanwhile, global risk aversion is pushing the German bunds to a record low, which in turn is adding more pressure on the yield spread to widen.

As long as the ongoing banking concerns in Spain persists, Spanish government securities are likely to continue weakening further while demand for the safest assets such as German bunds would pick up. This in turn could lead to further increase in spread between the securities of Euro zone’s largest and 4th largest economy.

Crude Oil Weakened by Surging USD

This morning in early Asian session, WTI oil futures prices are trading below $90.50/bbl with fall of more than 0.30 percent in Globex electronic platform. Prevailing economic concern from Euro-zone is weighing on Global Financial market.

Most of the Asian equities are slumped driven by bearish sentiment from Euro-area. The seventeen nation’s currency Euro is trading  at 1.2468 with fall of more than  0.20 percent  as Spain pose a new threat for Euro-zone, which might be making oil prices to trade in lower side. We may expect oil prices to trade under pressure by taking negative cues from lower equity market and basically concern from Euro-zone. From economic data point, major confidence index from Euro-zone are expected to fall for the month of May. Thus, it may further weigh on Euro, which will ultimately drive oil prices lower side. From fundamental front, crude oil stocks level is likely to increase near 22 years high in the last week, whereas very minute draw down in petroleum stock is expected. Due to normal weather condition, summer demand is expected to fall as per US energy department, which may pressurize oil prices. As per National Hurricane Centre, there is no threat from tropical storm in North Atlantic Area. So, overall trend for oil prices is expected to under pressure.

Markets have been hurt by the Spanish woes of a destabilized banking. We therefore expect the commodity sector to dip further amid the Euro plight. Concerns are now shifting from Greece to Spain where new bonds will be issued to fund the distressed lenders and indebted regions. This may feed in to more anxiety as the country’s refinancing ability may push borrowing cost to over 7%, a level that is unsustainable.

The European commission today will be setting out its strategy pointed for Spain and Italy to balance growth with fiscal consolidation. Besides, reports today from the Euro zone are likely to indicate an obstructive business climate, while the economic, consumer and industrial confidence may remain faint

 Currently, gas futures prices are trading above $2.496/mmbtu with a minute change of 0.30 percent in Globex electronic platform. We may expect gas futures prices to remain under pressure throughout the day on concern from declining consumption pattern by US consumer. There is no concern of tropical storm in Gulf areas, thus it may keep prices under pressure. Beginning of summer season may drive higher demand for Gasoline for summer driving demand which may weigh on the natural gas prices. ONGC is planning to increase its production which is another point for the lower side trend.

U.S Dollar rises: Its Rise against the European Debt Contagion

The perpetual socio-economic Greek unrest is keeping the financial markets on tenterhooks. The uncertainty over the policies executed to curb the spread of euro zone crisis has left the investors agitated. The reports of an impending European recession have made the investors across the globe take refuge in the U.S. Dollars.

Due to a flawed election in Greece, there is no immediate sign of truce between the warring Greek politicians to set up a new government. Moreover, Greek’s have rejected the debt reduction (austerity) measures imposed on them by the European Union and the International Monetary Fund (IMF) in order to get another bailout. The euro dipped further following the announcement from Greece’s president about conducting fresh elections.

Present European Economic Scenario

Germany’s robust exports in the first quarter of the year helped its economy to record a growth of 0.5%, surpassing previous forecasts. The economic growth of Germany, along with a 0% rise of French economy followed by the financial crisis of Spain and Italy has just prevented the European Union from slipping into a recession.

The trade in euro (the lowest since 18th January 2012) has gone down by 0.5% to $1.2761, while the session trough is recorded at $1.2752. The top performing European shares in the FTSE Eurofirst index fell by 0.7%.

The Bank of England (BOE) in its recently published inflation report has slashed its growth rate forecast from 3% to 2.6%. As a result of this report from BOE, the GBP (Great Britain Pound) came down to $1.5888 from $1.5987.

U.S economy: Its growth against the Euro zone calamity

According to investor sentiments, there is nothing special about the U.S and its currency. However, the recession-bound European Union and the fear of market regulation from central banks of Japan and Switzerland to control the depreciation of Yen and Swiss franc have left the investors with limited choice. This compelled them to opt for the green-back as a safer haven than other currencies.

The index of ICE Dollar (that measures the value of all the currencies against the Dollar) is on a steady rise. This is the best trade record of ICE Dollar since its inception in 1985. This growth in Dollar value has been the result of China’s slowing economy and the doubts on Greece survival in the European Union. Even other safe currencies like Yen, Swiss franc and Great Britain Pound are suffering a big blow because of the euro zone crisis. Recently, the Dollar was traded at $1.2716 (nearly 0.2% higher than Euro).

The Federal Reserve is formulating a slew of preventive policies to prevent any adverse effect on the US economy. This might stop the growth of the Dollar. The Fed is thinking of buying bonds to initiate its economic recovery program called Operation twist. These kinds of policies results in a weakened currency. This program is supposed to end very soon and the Fed will call for a meeting on June 19 and 20 of 2012.

Andrew Wilkinson, chief economic strategist of Miller Tabak & Co. based in New York, said that the impending global financial crisis has spurted a sudden rise amongst the investors who are buying the US Dollars. This is one of the reasons why the Fed is pursuing the bond buying program.

What To Expect From The EUR/USD

Yesterday, trading on international markets was thin as several European markets and the US were closed for a public holiday. At the start of the new trading week, sentiment on risk wasn’t that bad. Investors drew some comfort as opinion polls in Greece indicated that the conservative ND parity is (re)gaining support. The news triggered some kind of a relief rally of EUR/USD as shorts were reduced after last week’s steep losses. EUR/USD reached a correction high in the 1.2625 area early in European trading. However, the move lacked power and ran soon into resistance. The uptick was used to further offload euro long exposure. Later in the session, a similar pattern was seen on most European equity markets.

During the afternoon session, sentiment on European markets faltered further. The positive ‘reaction to the Greek polls was reversed as several headlines on the Spanish lender Bankia hit the screens. The troubled Spanish lender received €19B to address a capital shortfall. At the same time there was also still a lot of uncertainty on financial position of the Spanish regions. Spanish spreads were sharply wider, reaching 500+ levels. EUR/USD was already off the highs and the sell-off accelerated late in the session. EUR/USD came within striking distance of Friday’s lows, but a real test didn’t occur. Nevertheless, the yesterday’s price pattern only confirms that EUR/USD is still captured in a sell on-upticks price pattern. The pair closed the day at 1.2541 compared to 1.2517 on Friday. 

Today, the calendar is moderately interesting. In Europe, the German May CPI data will be published. Inflation is not the main focus of markets today. However, a soft figure might make things easier for the ECB to make its U-turn on more policy stimulation. In the US, the consumer confidence and the CS house prices will be published. For the consumer confidence released we see the risks to the downside of consensus. In the current environment, the euro is again a very sensitive barometer for risk. So, we doubt that there is any upside for EUR/USD in case of a weaker than expected figure, on the contrary. The economic developments in the US are interesting, but the focus will remain on Europe. At least for now, we don’t have the impression that a solution of the EMU debt crisis is coming closer, on the contrary. Greece is no longer the only source of heightened event risk. The financial situation in Spain is also becoming a permanent source of event risk. In this context, we don’t see any room for a sustained comeback of the single currency. This morning in Asia, equities don’t perform that bad (speculation on more policy stimulation in China?). However, we doubt that these kinds of factors will be enough to stop the downward spiral of EUR/USD. This is also the case for the US eco data that will be published at the end of this week. 

Crude Oil and Natural Gas Outlook

The euro was poised for the biggest monthly decline since September, before a sale of Italian debt tomorrow and data this week forecast to confirm that the prolonged debt crisis is hurting the region’s economy. The 17-nation currency was 0.2 percent from the lowest since July 2010 after yield premiums on Spain’s securities over Germany’s rose to the most in 17 years. Italy is scheduled to sell 3.5 billion Euros ($4.4 billion) of five-year notes and 2.75 billion Euros of 10-year.

Oil rose for a third day in New York as speculation that U.S. economic growth will boost fuel demand in the world’s biggest crude consumer countered concern Europe’s debt crisis will worsen. Crude for July delivery climbed as much as $1.13 to $91.99 a barrel. WTI Crude Oil is currently trading at $91.20 per barrel.

This morning in early Asian session, WTI oil futures prices are trading above $91/bbl with gain of more than 0.40 in electronic platform. Oil prices continued the positive trend by taking cues from higher trading Asian equities and speculation of US economic growth. Most of the Asian equities are opened on higher note with optimism from Greek support for Pro-austerity parties. Other side, concern from Spain’s banking sector is weighing on the seventeen nation currency Euro, which is trading below 1.252 levels with fall of more than 0.10 percent.  Spain’s borrowing cost for 10 year’s increased by 7 percent and the risk premium of Spanish Government bond over German bond climbed up .Thus, the euro is likely to be under pressure which may limit the gains in oil futures prices. From economic front, German’s import price index is likely to fall for the month of April which may reflect on lower CPI in May month. Thus, Euro may gain some points during European session. Likewise, from US consumer confidence level reading is expected to increase. Rise in manufacturing activities in May come with higher number for Dallas Fed Manufacturing index. Thus, oil prices may trade on higher side on the back of positive economic data expectation. As per National Hurricane Centre, tropical storm Beryl dissipated and became tropical depression. Thus, concern of supply disruption declined in Gulf areas, which may also limit the gains in oil prices. Overall, price trend looks upside with limited gains.

Natural Gas futures prices are trading below $2.561/mmbtu with fall of more than 2.5 percent in electronic trading. We may expect gas futures prices to remain under pressure throughout the day on concern from declining consumption pattern by US consumer. As per National Hurricane Centre, tropical storm Beryl dissipated and became tropical depression. Thus, concern of supply disruption declined in Gulf areas, which may also limit the gains in gas prices. Beginning of summer season may drive higher demand for Gasoline for summer driving demand which may weigh on the natural gas prices.

ECB governing council warned of a “Massive Shock”

Greece’s Athex Composite has plummeted to a new 22-year low, over heightened fears of an economic collapse. The Athens’ stock exchange, closed down 24 points at 503, a drop of 4.53% overnight.

Uncertainty in Greece has intensified despite EU leaders pledging support for the country, because no new measures have been announced yet to avoid a currency exit.

It’s basically a continuation of the same theme, they’re not feeling reassured that European leaders have got it covered.

However the rest of Europe saw gains despite Greece’s fall, with the German, British and French stock exchange all on the up.

Overnight London’s FTSE 100 was up 84 points, Germany’s DAX up 30, and the French markets up 35 points.

Shortly after an EU summit failed to produce a remedy, a May survey of eurozone business confidence showed the sharpest monthly fall for nearly three years while the data for Germany was the worst for six months and a survey in France, the poorest for 37 months.

European Central Bank President Mario Draghi said the EU was at “a crucial moment in its history” and that the debt crisis has demonstrated the EU’s weaknesses.

“The process of European integration needs a courageous jump in political imagination to survive,” he said, adding that while growth was a priority, “there is no sustainable growth without ordered public accounts.”

ECB governing council member Ewald Nowotny warned of a “massive shock” of unknown consequences if Greece should stumble back to the drachma and cautioned against taking the possibility too lightly.

Amid the strain, the euro slumped to a 22-month dollar low of $1.2516, but Europe’s stock markets staged a technical bounce after heavy losses on Wednesday despite a slew of bad news on the economy.

“Unless policymakers come up with radical new solutions … they will soon be faced with the prospect of delivering closer fiscal integration or overseeing the breakup of the euro,” he said.

If Greeks vote in new elections on June 17 for parties against the budget cuts and reforms tied to a second debt rescue, the EU, International Monetary Fund and ECB are expected to cut their financial lifeline.

That would in effect force Greece out of the eurozone and could cause incalculable risks for other weaker members, notably Spain.

Gold and Silver after EU inaction

The Asian equities have retreated by 0.2 to 0.7 percent after early morning Chinese HSBC flash PMIdeclined more than expectation. The Chinese FDI investments have also retreated for the sixth straight month in April and metal inventories have witness record stockpiling with weak manufacturing and consumption demand. All these are going to weigh on metals pack and may restrict gains in today’s session. Further, from Europe the non-official meeting between EU leaders did not achieve any result, boosting risk aversion sentiment. The European central bank has formed a work team to prepare for Greece leaving the euro zone.

The EU non-official meeting failed to reach any agreement, and European leaders will unlikely reach a consensus at the EU summit-taking place next month, so Greece will be forced out of the euro zone. International financial markets should be shocked. Global financial markets may continue to plunge, while the US dollar became a safe haven asset, and commodity and base metal prices should continue to weigh downwards. From the economic data front, the German trade figures along with GDP may improve substantially and may extend slight support to the dwindling metals, however capital investment, PMI and IFO figures may continue to decline due to weak sentiments and slower economic development and may continue to restrict gains in metals.

The Euro-zone PMI numbers are likely to decline after increased concern of the solvency of the region and increased risk from Greece exit and may restrict gains in base metals. The US durable goods ordered may also improve slightly at a slower pace while the weekly jobless claims may continue to increase albeit slowly and may further weaken base metals in the US hours. The Western equities have retreated drastically, may open slightly positive due to profit booking, restricting much falls in metals pack.

However, weak economic developments and slowing PMI numbers coupled with weak equities may continue to support down side in today’s session and hence we recommend initiating short position for the day.  

Gold futures prices continued to seek support after plunging below $1550 and at present are quoting up by 0.75% at the early Globex. The besieged Euro hovered just above the level seen last since July 2010 took the yellow metal and stocks along for the ride. The journey still continues for the Asian equities and the 17-block currency should have pressurized the metal but re-establishment of two rescue funds namely “Euro plus Pact” and a “European semester” would have unleashed the worry of a Greek default. Except this, the meeting offered no clear resolution over the country’s fate as the multiparty clash on Euro bond issue stalled with indication of stricter budget cuts.

The Euro outlook therefore remains bleak as fears of Greek muddle still persist. Amid such scenario market will be eyeing the host of economic releases from the globe anticipating some indication of economic progress. Early morning, the Chinese PMI stayed well below 50, indicating concern for manufacturing which would have stressed the Asian equities.

However, the estimates of German first quarter GDP may prove true due to a sharp jump in Trade balance to 17.4 billion Euros, highest in last one year. German PMI numbers would therefore also indicate progress in manufacturing activities. However, the Euro zone could really end up with poor PMI numbers. From the US, jobless claims may come at a blend as manufacturing sector remained unstable. Therefore, Euro and gold may find little support during the German releases but may not last for longer time.   Said above, the enduring Euro fret may still keep the metal under stress and hence we recommend staying short at higher prices.

Silver futures prices are quoting well above yesterday’s closing at the Globex with some sort of positivity on reestablishment of two rescue funds namely “Euro plus Pact” and a “European semester”. But the summit provided no clear resolution to the wrecked Spanish and Greek condition. Hence, market anxiety still remains for a potential Greek exit and a further weak Euro. Silver therefore is also expected to pare gains as the day progress. As discussed in gold’s outlook, the economic releases from Germany may provide slight support to the Euro and silver price but the recent fall in Chinese PMI to a below 50 mark raise doubt over the economic stability. So, the industrial metal may be under stress. And in evening, the US jobless claims may come at a blend but a probable rise in durable goods orders may support the dollar. 

Fairy Tales in the EU – Where Everyone Lives Happily Ever After

Expectations for progress at today’s EU Summit have been reduced after rumors circulating this past weekend suggested that the EU might take dramatic actions. There were rumors that the EU might socialize European debts by issuing so-called ‘Euro-bonds’ backed jointly and severally by its member states, rumors that further and even greater rescue funds might be forthcoming, rumors that the EU might make money from its various lending funds available for the bailing out of the European banking sector, etc.

Notwithstanding whether any of these are good or bad ideas, there are important dates on the calendar that essentially serve as ‘decision nodes’ which will condition whether the EU states will want to commit further capital to bailouts – particularly bailouts of Greece. Greece does not currently have a governing coalition, but there is the possibility that a new government might form with a mandate from the Greek people to renegotiate the principal terms and conditions of the loans given to Greece by the ‘troika’ of the European Commission, IMF, and ECB.

 

The World Bank, the OECD and the IMF have had fairly harsh words about the EU and their actions or inactions. There is hope that the new French President Hollande might be able to put a match to their feet. It reminds us of the old story about Cesar sitting back and watching Rome burn.

That is a non-starter as far as the EC and ECB are concerned and would probably end the troika’s support of the Greek economy and financial system. With that in mind, there is certain logic behind the seeming inactivity of EU leaders: they are waiting to see what materializes in Greece.

With hope fading for significant action at today’s EU summit, risk aversion is rising amid fears that Europe and markets are unprepared for the downside risks posed by the crisis. Global growth forecasts continue be shift lower, with the World Bank decreasing its outlook for China, somewhat offset by official, growth‐positive rhetoric. Risk aversion has climbed higher, equities are in negative territory, with 2% losses across Europe, bond yields are lower and the USD is stronger. EUR is down 0.25% after reaching a new low.

EUR remains historically strong, well above its average level since inception of 1.2145 and significantly stronger than the 2010 low of 1.1877. We expect EUR to trend lower; however do not think EUR will collapse. The combination of repatriation flows, value in Germany, the potential for the Fed to turn to QE3 and ongoing market belief that authorities will provide various levels of backstop support.

Yesterday, EUR weakened as headlines crossed that former Prime Minister Papademos was preparing Greece for an exit; however the headlines somewhat misrepresented the full context, which was far less inflammatory and suggested instead that an exit is unlikely to materialize but that it cannot be excluded as a possibility. Today the focus will be on the EU summit and the potential for broader inclusion of a growth compact within the fiscal compact, the potential for project bonds and the path ahead. Expectations are fairly muted that there will be a major development today. The next EU summit is June 28‐29

The EU Mini-Summit takes the World Stage

This evening, EU leaders will gather in Brussels for an informal dinner. The agenda is on jobs and growth to prepare a growth pact to be agreed on at the June 28/29 EU-Summit. More specifically, there are three main proposals. First, a €10 billion increase in capital for the European Investment Bank (EIB) for infrastructure projects. That would increase its leverage and could eventually release up to €180B for investment in infrastructure. Second, redirecting EU structural funds to other areas where it might reap more immediate growth rewards. On a third proposal, namely the issuance of project bonds, is already reached an agreement with the EU Parliament. The project bonds will be used to fund pan-European infrastructure projects. A pilot programme, using €230M EU Capital, will run until 2013 and if successful could lead to up to €4.6B of new investment. Apart from these three items, EU President Van Rompuy pushed for an open debate (“no taboos”) concerning the longer term perspective. In this perspective, the idea of the creation of Eurobonds is put back on the table by French President Hollande with the backing of amongst others Spanish PM Rajoy and Italian PM Monti. Yesterday, also the OECD and the IMF backed his call.

However, Germany and Austria already countered the proposal by saying that the issuance of common debt should come with the creation of a fiscal union. So, despite the “show” of unity, the respective positions of the two sides still look to be virtually immiscible. Other points that might be discussed are delaying the fiscal targets for some EMU countries and the possibility of allowing the ESM to lend directly to banks and the possibility of granting the ESM a banking license. Changing the ESM to allow it to lend directly to the banks would represent a fundamental change in the euro zone’s approach to the crisis. The other option, giving the ESM a banking license, is also an option that Germany will probably even not contemplate discussing. Sources said that there will be no official press statement after the meeting.

Regarding trading, Asian equities are trading weak. Disappointment that the BOJ stayed on hold is one reason, but some rumors about an eventual preparation of Greece leaving the euro are more important. DJ is the source of the rumor, but a CNBC report seems to deny it. Former Greek PM Papademos should have said that, while such preparations are not being made in Greece, he couldn’t exclude that elsewhere such preparations were considered, even if he thought it unlikely. Whatever, it shows the uncertainties and nervousness in the market. Today, attention will go to the Summit dinner, which takes place after European closure and no statement is expected. The German Bund opened this morning at levels reached in yesterday’s aftermarket trading (ie higher than the official close). Today, the eco calendar is once again negligible and volatility and sentiment will likely drive trading again. The Schatz auction (0% coupon) will likely get a lot of media attention but we think it will go well

Gold and Crude Oil Hold Steady

Gold is poised to decline after Germany and China pledged support for economic growth, lowering the appeal of the precious metal as a haven. Spot gold traded little changed at $1,591.79 after declining 0.2 percent. June-delivery bullion gained 0.2 percent to $1,591.50 in New York. Holdings in exchange-tradedproducts expanded to a three-week high of 2,386.564 metric tons yesterday 

Germany will consider all ideas on bolstering euro area growth, Finance Minister Wolfgang Schaeuble said yesterday, after Chinese Premier Wen Jiabao said over the weekend that China will focus more on spurring growth. That helped drive Asian stocks, oil and copper higher for a second day today. The euro held near a one-week high against the dollar before a European Union summit tomorrow to discuss the debt crisis.

Oil traded near the highest price in three days in New York on speculation a strengthening U.S. economy will increase fuel demand and the Obama administration will refrain from easing sanctions against Iran.

Futures were little changed after rising for the first time in seven days yesterday. The U.S. won’t support relaxing the sanctions that are hobbling Iran’s oil exports when negotiators meet in Baghdad tomorrow for a second round of talks on the Persian Gulf nation’s nuclear program, according to officials who declined to be identified because of the sensitivity of the issue. Existing U.S. home sales climbed last month.

Crude for June delivery, which expires today, was at $92.70 a barrel, up 13 cents, in electronic trading  on the New York Mercantile Exchange. The more-actively traded July contract climbed 12 cents to $92.98. Front-month futures rose 1.2 percent yesterday and are down 6.2 percent this year. Brent oil for July settlement was at $108.90 a barrel, up 9 cents, on the London-based ICE Futures Europe exchange. The front-month price for the European benchmark contract was at a premium to New York crude of $15.92, from $15.95 yesterday.

A Monday Morning Look at Crude Oil and Natural Gas

With confirmation of Greece remaining a part in the 17-nation Euro Zone, sentiments across the globe have improved and the week has begun on a positive note. But the Group of Eight (G8) leaders continue to stress that Greece needs to keep a close check on its financial commitments. Although long-term concerns remain intact, the news of Greece remaining a part of the Euro Zone has come in as a relief.

The G8 leaders stressed on the fact that while global economic recovery is showing signs of improvement, risks persist. Global policymakers look forward to focused steps and measures towards the European crisis and this hope if expected to be a positive sentiment booster in the near-term.

The last week saw sharp gains in the US Dollar Index (DX) as global financial markets continued to struggle with the ongoing economic woes. Demand for the DX was boosted as investors moved away from higher-yielding and riskier investment assets such as equities and commodities. The currency has stabilized above the 81-level in the past week and this strength is expected to continue in the near term.

During early Asian session, oil futures prices are trading above $91.80/bbl with gain of more than 0.60 percent in Globex electronic platform. Oil prices have rebounded from its weekly low as Iran oil minister said prices will certainly increase if the European Union moves ahead with the oil embargo in July. In the G8 Summit, leaders also addressed the possibility of oil shortage when new sanction against Iran’s oil export takes effect next month.

On the other side, US president Barak Obama says the leaders of world’s biggest economies are beginning to agree that more jobs and more growth will help to reverse European crisis. Optimism of Greece to stay in Euro area have supported Euro to bounce back and currently up by 0.15 percent at 1.2794 levels. Most of the Asian equities are also trading on higher side, which may continue to support oil futures to remain on positive trend. From the weekend, Seaway pipeline have started to deliver crude oil from Cushing to Gulf refineries in order to reduce the glut of inventory level. So, fall in stock level is also likely to support oil prices to take positive cues. Overall, we may expect oil futures prices to remain on positive side throughout the day.

Currently, gas futures prices are trading below $2.725/mmbtu with fall of more than 0.60 percent in Globex electronic platform. As per US weather channel, weather condition in most of cities in US is expected to remain warmer than normal temperature which may pull demand from a/c units. However, higher storage level reported in the last week, may limit the gains.

Economic News You Need To Know on Friday Morning

Asian shared tumbled in early Friday trading as investors worry about the eurozone crisis and Greece. The potential new Prime Minister of Greece threatened and demanded that the EU change their policies and agreement with Greece.  Investors are beginning to worry about contagion as a Greek exit is more inevitable.  The question is will the EU oust Greece or will Greece recede.

Gold jumped more than 2.5%, the most since October, on chart based buying around long term support levels.  Gold holdings  of SPDR gold trust, the largest ETF backed by the precious metal, declined to 1,278.71 tons, as on May 17.

Silver holdings of iShares silver trust, the largest ETF backed by the metal, increased to 9,619.02 tons, as on May 17. India’s demand for gold dropped 19% on y-o-y basis in the January-March period, while Chinese demand rose 7% in the same period.  The two emerging markets accounted for 54% of global gold demand in the quarter.

The dollar index, which measures US unit against a basket of six major, declined to 81.335, from 81.359 late North American trading Wednesday. 

Spain was in focus, as it sold 2.49bn Euros of shorter-dated government bonds in an auction, with average yields rising significantly compared with previous sales of the paper.

The European Central Bank said it had stopped providing liquidity to some Greek banks that had not been successfully recapitalized.

Copper traded steadily, around 4-month lows, as sentiment were cautious given worries that Spain might be hit hard if Greece leaves the euro and defaults on its debt.

Global copper market was in deficit of 152,000 tons in the first quarter of 2012, as compared to a surplus of 320,000 tons in the year ending CY2011.

Lead market was surplus of 10,900 tons in the first quarter of 2012, compared to a surplus of 3,600 tons the year ending 2011 while zinc market was surplus of 161,000 tons in the first quarter of 2012, compared to a surplus of 540,000 tons the year ending 2011

Nickel market was surplus of 6,200 tons in the first quarter of 2012, compared to a surplus of 8,600 tons the year ending 2011

Crude oil prices declined to 6-month lows, on speculation that Spanish banks may have their credit ratings lowered and a gauge of trailed US manufacturing estimates, bolstered concern that economic growth and fuel demand.

Iranian oil shipments to Japan may be blocked, after the bank handling payments on the transactions was ordered by a US court to freeze assets belonging to the Persian Gulf nation

Natural gas futures declined, as the US Energy Department report showed that natural gas stockpiles rose 61bn cubic feet to 2.667 trillion cubic feet for the week that ended May 11.

May 18th A Memorable Day for Mark Zuckerberg and Facebook

Over the past few years, I think all of us have followed Facebook’s meteoric rise and gotten to know Mark Zuckerberg as he has grown to an adult and guided his famous company through its infancy.

I have heard a lot of negatives and envious comments made. Even as the company counts down to the last few days before their IPO, traders, gurus, economists, and analysts, have said their share gotten in their two cents worth, but those who say that Mark Zuckerberg is not mature enough, old enough, wise enough to run this huge company, need to ask themselves who gave birth to this company, who has guided it to be the largest IPO in history and who hired the right people, who make the right decisions.

This week for important things are about to happen.

  1. Mark Zuckerberg will turn 28
  2. I will celebrate my birthday, which very few people will realize
  3. Mark Zuckerberg will become one of the richest people in the world
  4. Facebook will become one of the highest valued internet companies in the world

 

I say well done Mark, you should be proud.

Best wishes.

I have nothing else to really say, all the news and press, analysis and economists have said it all, there are experts writing volumes on Mark Zuckerberg and on Facebook.  There are excellent financial evaluations and statistics, studies and research. There is nothing original or new for me to add.

Crude Oil Inventory High Prices Low

Oil prices fell to fresh six-month lows below $93 a barrel Wednesday in Asia after a report showed U.S. crude supplies surged more than expected last week. In the US trading session oil continued to decline to drop to 92.00 bouncing back later to 93.20

Benchmark oil for June delivery was down $1.22 to $92.76 a barrel, the lowest since November, at midday Singapore time in electronic trading on the New York Mercantile Exchange. The contract fell 80 cents to settle at $93.98 in New York on Tuesday, and closed below that on Wednesday. Brent crude for July delivery was down $1.14 at $110.31 per barrel in London.

The American Petroleum Institute said late Tuesday that crude inventories rose 6.6 million barrels last week while analysts surveyed by Platts, the energy information arm of McGraw-Hill Cos., had predicted an increase of 1.5 million barrels.

EIA figures release on Wednesday contradicted the API report stating “U.S. commercial crude oil inventories (excluding those in the Strategic Petroleum Reserve) increased by  2.1 million barrels from the previous week. At 381.6 million barrels, U.S. crude oil inventories are above the upper limit of the average range for this time of year.”

Markets rely on the API estimates as an indicator of the Energy Admin. actual figures released on Wednesday. Lately the API estimates have been far off base.

Inventories of gasoline fell 2.6 million barrels last week while distillates tumbled 1.6 million barrels, the API said.

The Energy Department’s Energy Information Administration reports its weekly supply data later Wednesday.

Crude has plunged more than 12 percent from $106 earlier this month amid investor concern global economic growth will slow more than previously expected this year. U.S. crude inventories are at a 22-year high amid weak demand and growing production.

Greece announced Tuesday it would hold new elections, probably next month, after politicians failed to form a government after a vote earlier this month. Traders fear Greece may drop the euro currency, which could trigger a loss of confidence in other debt-burdened European countries such as Spain and Italy.

Europe is already teetering near recession this year, and further political turmoil could hurt economic activity and demand for crude.

“The chances that Greece will leave the euro-zone sooner rather than later are growing,” Capital Economics said in a report. “The key question remains whether the policymakers can prevent contagion effects from prompting a bigger and much more damaging breakup of the currency union.”

Market Review May 15, 2012

While the broad sentiments prevailing in the market continue to be bearish, commodities and shares were seen rising following a rebound in euro. Recovery in Euro from a four month low after a surprisingly strong German GDP data took the pressure off the market and slightly lifted the sentiments. German economy grew 0.5 per cent in the first quarter against the expectation of 0.1 per cent. Euro Zone GDP data indicated that the region avoided recession though the economy continued to remain fragile.

However, the overall sentiments were feeble on deepening worries over euro zone crisis and political uncertainty in Greece. Spot gold was off its four and a half month low as continuing global economic uncertainty boosted the yellow metal’s safe haven appeal. The recent slide in prices attracted lower level buying from Asia too.

Gold was seen trending lower as the rupee retreated after breaking against a US dollar. Base metals in LME were moving mostly steady to negative. Concerns over slowing growth in China and political uncertainty in Greece dragged down copper prices, mostly ignoring the upbeat data from Germany, to a four month low.

MCX copper followed the suit too. Crude oil pared the earlier losses and was seen rebounding though it continued to hover near the five month low levels in Nymex. However, expectation of higher build up in crude oil inventories may keep the gains under check. 

Market mood continue to remain skeptical as investors fretted about the possibility of a Greek exit from the Euro zone.  With financial markets under the grip of political mayhem in Greece, all eyes would be on the U.S retail sales and manufacturing numbers slated for release in the evening to cushion battered sentiments.  In foresight, financial markets would be fervently watching out for political events in Europe for further cues. 

With Europe reeling under both financial and political strain, all eyes are on today’s meet between German Chancellor Angela Merkel and new French president Francois Hollande. Also in the limelight amidst falling crude oil prices, are the API crude inventories data scheduled for release early morning and could further show buildup in stockpiles.

The recent string of weak numbers from China is raising fresh concerns about the pliability of the Chinese economy amid softening global demand and, in that regards, housing numbers from the country would be an important economic event in coming days as it could have significant bearing on commodity prices.

What’s Up for the Markets This Week

Europe will carry much of the global tone this week, in two respects.  First will be the risk of an election call in Greece as soon as this weekend.  Under Greek election law in the absence of a majority outcome, each of the top three parties is given the opportunity to strike a coalition government.  That seems untenable given a very rigid position that the far left party has carved out, including a promise to default on Greek debt, renounce support for the European/IMF bailout, and nationalize banks. 

The second form of risk posed to markets by European developments will take the form of Q1 GDP growth across the euro zone.  The risk here is whether or not several countries slip into technical recession.  Expectations for Germany’s economy are muted with only 0.1% q/q annualized Q1 growth following a mild Q4 contraction.  Similarly, the French economy is expected to post no growth in Q1 following a mild expansion in Q4.  This is expected to be mirrored for the euro zone as a whole as Q1 GDP is expected to drop for the second consecutive quarter.  The UK has already released Q1 GDP which showed the country slipping into technical recession, but next week’s BoE Inflation Report, trade and unemployment figures will be closely watched.  

US markets could chip in and drive much of the global tone in two ways next week: through providing further color on the stimulus debate at the last FOMC meeting; and via first tier data.  The FOMC minutes on Wednesday will shed further light on internal discussions at the FOMC meeting on April 24-25th. 

The FOMC minutes will reinforce this overall bias that was unwilling to provide any further nod to further stimulus prospects.  That disappointed markets which had wrongly anticipated that the Fed might provide just such a signal in contrast to what should be understood to be its tendency to wait to be convinced by a souring tone to growth, inflation and market risks before acting. 

Data risk will be principally represented by Tuesday’s CPI report that should provide a further cooling of y/y pressures just as TIPS break-evens continue to march lower — thus providing the Fed with some comfort that its price stability mandate is under no clear threat.  Tuesday will be the biggest day of the week for data risk since retail sales are also due out that day and are expected to put in a more subdued gain than the prior month’s impressive report. 

The US conducts a ten-year TIPS reopening; this contract has materially richened since mid-March, shedding about 25bps in break-even yield partly because of reduced inflation expectations but also because TIPS benefit less from safe haven flows than nominal Treasuries — thus introducing a liquidity distortion to break-evens.  The only Fed speaker on tap is St. Louis Fed President James Bullard (alternate 2012, voting 2013) who speaks on the US economy later in the week and who is a relative hawk opposed to further stimulus.

Asian markets should pose only modest risks to global markets next week.  Chinese property prices top the list of risk factors and the April update is slated for release on Thursday.  A broadening array of cities have been witnessing falling house prices as China’s housing markets cool down.  RBA minutes from the May 1st meeting will be reviewed for signs of an ongoing easing bias and that could impact the AUD  which has been among the weaker currency crosses against the USD via a 3½% drop since just before the May 1st RBA meeting.  Japanese Q1 GDP is expected to post a healthy 0.9% non-annualized rise following the 0.2% contraction in Q4, thus enabling Japan to hopefully avoid a technical recession that threatens Europe.

China By The Numbers

China’s April data is very much skewed negatively for the economy. With GDP growth slowing down coupled with slowing Industrial Production and Retail Sales growth in the nation, the new quarter doesn’t seem encouraging to the investors. However, there were some positive data outcomes with respect to the slowing CPI and expanding Manufacturing PMI numbers. The slowing CPI numbers and falling global crude oil prices is giving some room for the policy makers to loosen some stance on the monetary side. The PMI trend over the past few months suggests that the risk of an immediate economic hard landing is disappearing, and the underlying momentum of the manufacturing sector has improved. The discrepancy seen in the total Industrial Output and manufacturing PMI seems nothing more than just the base effect.

Also, April trade balance figures from China also stands firm. The country reported positive trade balance for the month beating the consensus at reach above $18 billion for the month. Though the y-o-y export growth seems to slow down, the total export value stands firm at $163.30 bn.

The latest GDP growth rate of China reveals that the Double digit growth in the world’s second largest economy is officially over. China this month reported that gross domestic product (GDP) growth slowed to 8.1 percent a year in the first quarter of 2012, down from 8.9 percent in the previous quarter. On a q-o-q basis too, the economy has slowed down to 1.8 percent from above 2 percent growth rate in the previous quarters.

Much of the slowdown in China’s GDP stemmed from a drop in demand for its exports in Q1 in key markets including the US and Europe.

Apart from the drop in demand in Q1 of the calendar year, the real issue has been its housing sector. Residential housing investment represents around 15 percent of overall investment in China. The Chinese leadership’s efforts in bringing down housing prices and curbing speculation have worked. For the first quarter of the year, new housing starts were down 5.2 percent year over year, while sales were down 15.5 percent.

However, the main reason for the slowdown in housing has been restrictions imposed by the government, not lack of demand. Thus, any relaxation by the authorities of the restrictions so imposed is likely to boost investment in housing and construction sector. But, the probability of this event seems very low in immediate term.

Easing inflation potentially gives Beijing more scope to loosen policy to help the economy rebound from a first-quarter slowdown in growth. Also, we easing global crude oil prices and easing food inflation in China, we feel a further drag in the CPI numbers ahead. We believe that there is a high probability that China will cut its RRR and move towards a monetary loosening stance to support the low growth rate.

Looking at the above parameters the Chinese economy needs some easing in terms of monetary stance by its officials. Be it with relaxing the reverse requirement rates or controls over the housing sector, only such moves can bring back confidence of investors in the economy.

This latest set of data is comforting to the policy makers.  On Sunday the PBOC announced the first round of cuts of reserve requirements. The Chinese central bank will cut the reserve requirement ratio (RRR) a few more times this year to manage liquidity and to support growth.

Nevertheless, a strong recovery is still not seen in months ahead, as the Chinese economy will continue to be haunted by both external and internal risks. The biggest external risk comes from Europe’s unresolved debt crisis; while the major internal risk would be a slump in the property market amid stringent government measures.

May 11, 2012 Crude Oil and Natural Gas Update

Asian stocks are heading for their worst week in almost six months as political changes in France and growing instability in Greece threaten to derail austerity plans and worsen Europe’s debt crisis.  An Asian export slump exacerbated by Europe’s sovereign debt crisis and an uneven recovery in the US is putting pressure on policy makers to pledge stimulus measures to boost growth.

Currently during the Asian session, Crude oil futures prices are trading below $96/bbl with fall of more than 1 percent in Globex electronic platform. Concern of Euro-zone debt crisis which may lead to lower oil demand and higher stock piles are continue to weigh on oil prices movement.  As per OPEC, Iraq the member country is seeking to double its production by 2015. This March production has increased by more than 7 percent, whereas fall in Iran production is seen. Overall, production has increased by OPEC countries. US stock piles are also above 22 years high in Cushing delivery centre. From Economic front, most of the Asian equities are trading in a negative note on concern of rising European debt crisis. Greece is waiting for another round of vote to form a new government, which is keeping Euro under pressure. Monetary easing concern has arrived due to lower inflation data reported today early morning. So, by taking negative cues from above mentioned factors we may expect oil prices to trade under pressure during Asian and European session. Likewise, in the evening session also economic releases in the form of University of Michigan Confidence is likely to decline, which may create negative impact on oil prices.

At present, gas futures prices are trading below $2.450, with fall of more than 0.50 percent from yesterday’ closing. This, may be a technical correction on prices after such a long drive of bullish trend, as fundamental remain unchanged for gas prices. Today, we may expect gas prices to trade in a positive trend. As per US Energy department, natural gas storage has increased by 30 Bcf, which is higher than prior week storage data and lower than survey. Thus, higher production level may limit the gains in gas prices. On the other side, as per Midwest Weather Channel, weather is expected to remain warmer than normal for couple of weeks, which may support gas demand to rise.

While markets are in risk aversion mode, most commodities have been lower; Natural Gas has been the surprise. As the USD continues to climb to recent highs, we expect that energy and metals will continue to be depressed.