London 09/08/2011 - Even Hollywood would have struggled to come up with a script as good as the events yesterday with the biggest economies in trouble, stock markets in free-fall and widespread riots and looting on the streets. Turbulence continued to dominate the financial markets following the downgrade in US credit rating by Standard & Poor’s Friday. Equity markets were hard hit across the day with the MSCI Asia Pacific Index down 3.1%; Eurozone Stoxx 50 Index down 3.7% while the Dow was off 5.5% by the close and the S&P500 6.6%. In contrast gold continued to gain ground on the back of continued flight-to-safety demand with the yellow metal opening up over $20 higher than Fridays close and climbing to a record peak of $1720/oz. Mixed sentiment was seen across the rest of the precious complex with silver up 2.8% by the close; platinum up 0.3% while palladium settled down 2.1%. In the currencies despite the downgrade the greenback closed higher against most of its counterparts with the DXY up 0.45%; the euro settled down 0.8% against the dollar and 1.6% versus the yen. Demand for safe-havens led the German 10-year bund to decline a further 7-bp, however the efforts of the ECB to buy peripheral bonds led peripheral premiums over the German bund to narrow; the 10-year Greek premium declined 34-bp, Portuguese 33-bp and Spanish 95-bp. Equity markets have extended their weakness overnight with the Hang Seng Index off 6% at one point while the MSCI Asia Pacific Index is off 2.5% at the time of writing and the Nikkei 1.6%. Chinese data has also created some jitters as inflation proved higher than expected with CPI up 6.5% versus a forecast 6.4% and PPI 7.5% against an estimated 7.4%. Japanese Household Confidence has also proved weaker than estimated at 37.0 having been expected at 37.6. Choppy trade has been seen in the currencies with the Australian Dollar below parity against the greenback at one point; the DXY is currently down 0.4% while EUR/JPY is up 0.3%. Economic data today includes UK Industrial & Manufacturing Production, Trade Balance and US NF Productivity. Also the FOMC will set interest rates with traders likely to scrutinize the Fed’s statement following the downgrade. Gold has surged higher overnight touching a record $1772/oz and new lifetime peak in numerous currencies including euro’s; sterling, Yen and Canadian Dollar; Indian Rupee gold has surged to INR 80,000/oz, up some 26% YTD. The yellow metal has since backed off and may run into more profit taking short-term; there is also the risk of a margin hike by the large exchanges, similar to that seen in silver. However, much of the demand has been seen in the OTC and ETF investment sector and reflects genuine concerns investor have towards the financial markets and as a result we expects dips to be viewed as buying opportunities with gold to continue to test higher.

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