INFORMATION DECK ABOUT YOUR KNOWLEDGE: Weakened

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Saturday, March 23, 2013

Weekly Fundamentals - Commodities Weakened amid Speculations of Fed's Early Exit

ONG Focus | Insights | Written by Oil N' Gold | Sat Feb 23 13 03:56 ET

Last week began with further weakness of Japanese yen as G-20 statement largely shrugged off concerns over competitive currency depreciation in major economies. Release of the FOMC minutes caught most attention towards the end of the week. The minutes for the January FOMC meeting indicated that policymakers were more upbeat on the US economic outlook as driven by improved business confidence and household consumption. They acknowledged better employment conditions but stressed that 'the recovery in the labor market was far from complete'. The debate on additional QE remained rigorous but balanced. The focus was on the benefits and costs of additional asset purchases. While some suggested asset purchases to end 'well before the end of 2013', others warned of the 'significant' costs of ending purchases prematurely. Rigorous discussions about continuation of QE have triggered speculations of an early exit which sent the US dollar higher but risky assets including commodities and stocks lower.

Precious Metals: The complex declined last week with gold and silver losing -2.26% and -4.63% respectively. For PGMs, platinum and palladium plunged -4.19% and -2.16% respectively. The hot topic for precious metals is whether gold’s long-term uptrend has ended. The yellow metal made a record high above US$ 1900/oz in September 2011. Since then, price has been range-bounded with 1500 being the lower boundary. After failing to re-test the record high in October, gold price has since then declined -12%. A close look as the correlation between gold, US real interest rates and the USD should give us some insight on the issue.

Traditionally, US real interest rates are negative correlated with gold price, i.e. it is positive for gold as real rates are low and/or negative, as lowest interest rates reduce the opportunity cost of owning the precious metal. The following chart shows that the Fed’s QE programs have driven real rates lower in the past few years. However, recent FOMC meetings signaling that the central bank might terminate QE sooner than previously anticipated have lifted real rates. This has in turn put pressure on the yellow metal. While unstable, gold is conventionally believed to be trading in opposite direction as the greenback. The strength of the USD index in recent weeks has given additional pressure to gold.

It appears that these two indicators have been negative for gold’s outlook. Yet, investment demand has remained firm. Despite outflows, the size has remained modest. Data from SPDR Gold Trust suggested that ETF gold holdings have declined only -4% since October 2012 when gold price has dropped more than -10%. Indeed, although it is likely that downside risks to gold remains, whether there is a structural change in the price trend depends on further weakness in economic data from the US and China.

Natural Gas: The DOE/EIA reported that natural gas inventory fell -127 bcf to 2400 bcf in the week ended February 15. Stocks were -242 bcf less than the same period last year and -361 bcf above the 5-year average of 2 039 bcf. Separately, Baker Hughes reported that the number of gas rigs added +7 units to 428 in the week ended February 21. Oil rigs decreased -8 units to 1 329 and miscellaneous rigs remained unchanged and the total number of rigs fell -1 unit to 1 761. Directionally oriented combined oil, gas, and miscellaneous rigs added +3 units to 197 units while horizontal rigs added +1 unit to 1 140 units and vertical rigs slid -5 units to 424 during the week.

Crude Oil: Crude oil prices showed a reverse of the rallies over the past weeks with ease in geopolitical tensions and Saudi Arabia’s potential increase in output being the key factors. After cutting production in 4q12, the world’s largest oil producer is expected to rise exports in 2Q13 so as to meet demand in countries such as China. The front-month contract for WTI crude dropped -2.85% while the Brent crude contract fell -3.035. The WTI-Brent spread was narrowed modestly.

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Friday, March 22, 2013

European Shares and Japanese Yen Weakened Further

ONG Focus | Insights | Written by Oil N' Gold | Tue Feb 19 13 00:15 ET

The US market was closed on the President Day while European stock weakened as the ECB President Draghi cautioned of risks to economic outlook in the Eurozone. Japanese yen continued its slump, now at the lowest level in 33 months, after the G-20 shrugged off the risks of currency war. Moreover, the market was moved by conflicting comments from Japanese official. In the commodity sector, the front-month contract plunged to a 4-day low of 95.21 before settling at 95.86 before settling at 95.86, down -1.49% while the Brent crude contract slipped -0.24%. Gold price remained fragile with the benchmark Comex contract losing for the third consecutive day to as low as 1596.7 before ending the day at 1609.5, down -1.59%.

In a speech at the European Parliament, the ECB President Draghi addressed the competitive depreciation of foreign exchange rates. He stated that "most of the exchange rate movements that we have seen were not explicitly targeted, they were the result of domestic macroeconomic policies meant to boost the economy. In this sense, I find really excessive any language referring to currency wars". He believed that both the nominal and real exchange of the euro has remained around its long-term average. Concerning the economic prospect, Draghi forecast that "economic weakness in the early part of 2013 is expected to be followed by a very gradual recovery later in the year" but he warned that "considerable further efforts are needed to ensure that Europe continues emerging from the crisis".

The BOJ's minutes for the January meeting indicated that a few members were reserved about the upgrades of Japanese economic outlook. Meanwhile, 2 BOJ members expressed that extending the maturity of BOJ bond buys was an option. Yet, the minutes were overshadowed by comments from policymakers. Japanese Finance Minister Taro Aso stated that the government has no plan to buy foreign bonds. His comments contradicted with Prime Minister Shinzo Abe who reiterated that buying foreign bonds "exists as one idea". The next focus is the upcoming BOJ governor. News headlines stated that Toshiro Muto, a less dovish candidate than Haruhiko Kuroda or Kazumasa Iwata, is the leading candidate for the post. Abe stressed that he expects the governor to reflect the government's determination to beat deflation. Abe stated that "it would be necessary to proceed with revising the BOJ law if the central banks cannot produce results under its own mandate".

The RBA minutes released in Asian session unveiled that recent rate cuts have shown effects in boosting the economy while benign inflation might trigger further rate easing. Regarding developments in China and Japan, the minutes stated that "a wide range of indicators showed that growth in the Chinese economy had stabilized, underpinned by public spending and somewhat stimulatory financial policies... There had also been indicators of stronger growth of domestic demand" in East Asia with the exception of Japan.

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Thursday, March 21, 2013

Financial markets Weakened on Italian Political Uncertainty

ONG Focus | Insights | Written by Oil N' Gold | Tue Feb 26 13 00:51 ET

Financial markets slipped on concerns over the election in Italy. Exit polls suggested that a hang parliament would be formed amid the neck to neck race between the centre left party and Silvio Berlusconi's centre right coalition. In China, HSBC's flash manufacturing PMI was disappointing but the results were likely affected by Lunar new Year holiday. The US Fed Chairman Bernanke will begin his semi-annual testimony before Congress. Ahead of the meeting, Dennis Lockhart, the Atlanta Fed president stated that the US economic growth could exceed expectations this year but ongoing monetary stimulus is needed for sustainable recovery in the job market. Wall Street declined with the DJIA and the S&P 500 indices losing -1.55% and -1.83% respectively. In the commodity sector, the front-month contract for WTI crude oil initially slipped to an 8-week low of 92.07 before rebounding to 93.11 at close. The Brent crude contract also recovered after dipping lower earlier in the day. Gold price rose on bargain hunting with the benchmark Comex contract adding +0.88%.

Italy’s election sparked fresh fear for the euro as exit polls showed that a hung parliament would likely be formed. Accordign to Reuters, the center-left would have a solid majority in the lower house in terms of votes. However, it would not be able to pass bill without the Senate. Moreover, the Italian Centre for Electoral Studies estimated that Bersani's coalition would take 121 seats to, Berlusconi 117, Grillo 54 and Monti’s centrist coalition 22. No party or likely alliance with the 158 seats needed to form a Senate majority.

In China, HSBC's flash manufacturing PMI dropped to 50.4 in February, compared with consensus of 52.2 and down from 52.3 in January. The sub-indices of new orders and output fell -2.5 points and -2.2points respectively while the new export orders index slipped -0.7 points to 49.8. Yet, it should be cautioned that the results were subject to seasonal adjustment due to the Lunar New Year holiday.

On the dataflow, the US S&P/Case-Shilller Composite-20 probably gained +6.7% y/y in December from +5.5% a month ago. House price index might have added +0.6% m/m in December, same level as November. Meanwhile, consumer confidence probably increased +1.2 points to 59.8 in February while new home sales might have increased to 385K in January from 369K in the prior month. The Fed Chairman Ben Bernanke will testify at the Senate Banking Committee today.

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Sunday, March 17, 2013

Crude Weakened on Inventory Increase

ONG Focus | Insights | Written by Oil N' Gold | Wed Mar 13 13 23:14 ET

Wall Street made record highs again as driven by stronger-than-expected US retail sales. Earnings results from Costco also beat expectations. Gains in shares were, however, limited by disappointing Eurozone IP and US President Obama signaled unsuccessful deal to end sequester. DJIA climbed +0.04% to end the day at 14455.28 while the S&P 500 index added +0.13% to 1554.52. In the commodity sector, oil prices plunged with the front-month WTI crude contract slipped to as low as 91.91 before ending the day largely unchanged at 92.52. The Brent crude contract plummeted for a 4th consecutive day to 107.91, the lowest level in 3 weeks, before settling at 108.52, down -1.03%. In the commodity sector, gold slipped after failing to re-test 1600.

The market was boosted by Costco Wholesale Corp.'s quarterly result in which net income gained around +38% to US$547M, driven by a tax benefit on a dividend paid to an employee retirement program. Meanwhile, US retail sales climbed +1.1% m/m in February after adding +0.1% a month ago. The strong-than-expected result indicated that consumers have not been adversely affected by tax hikes and high gasoline prices. Excluding autos, retail sales rose +1.0% m/m in February, following a +0.2% gained in January. However, market sentiment was, however, contained by Eurozone's industrial production which fell -0.4% m/m in January, compared with a upwardly revised +0.9% gain in December. On annual basis, IP fell -1.3% after a revised -1.7% drop in December.

On oil inventory, the DOE/EIA reported that total crude oil and petroleum products stocks declined -5.58 mmb to 1080.79 mmb in the week ended March 8. Crude stockpile increased +2.62 mmb to 388.96 mmb as inventory soared in 3 out of 5 PADDs. Cushing stock added -1.53 mmb to 49.32mmb. Utilization rate was down -1.20% to 81.0%.

Gasoline inventory dipped -3.57 mmb to 224.31 mmb although demand rose +3.14% to 8.63M bpd. Production added +4.04% to 8.95M bpd while imports climbed +20.17% to 0.73M bpd. Distillate inventory added +0.08 mmb to 120.44 mmb although demand plunged -13.2% to 3.35M bpd. Imports soared +126.79% to 0.25M bpd while production fell -2.16% to 4.16M bpd during the week.

The RBNZ is expected to leave the OCR unchanged at 2.5%. The pause would likely continue until next year. The SNB would also leave the 3-month LIBOR rate at 0-0.25% and policymakers would also pledge to maintain the EURCHF floor at 1.20.

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