Market Commentary
Key Notes: CME Group raised the margin requirements for crude futures for the fourth time since February. Margins will climb by 25% as of the close of business Tuesday. This increases the cost of holding positions for hedgers and speculators. Crude oil prices fell initially in early trade but staged an impressive rally with strong gasoline prices and robust crude oil imports from China. China’s crude oil imports in April is the third highest level on record, suggesting that demand remains strong in the world’s second largest oil consumer.
Since the sharp plunge in commodities last week, investors have been bargain-hunting so far, contributing to a rebound in prices. Ahead, we will receive Consumer Price Inflation figures from China that will influence commodity markets. A cooling of inflation is crucial for the rally in commodities to continue as it reduces the likelihood of aggressive monetary tightening.
Chinese inflation is forecasted to edge down to 5.2% in April. Rising food prices has been one of the main causes of inflation. With costs now falling, inflation could slow. In addition, a higher base of comparison in the year-earlier period may reduce the annual rate of inflation.
Market Summary
Precious Metals: Gold and silver rose for a third consecutive day. Bargainhunting continued after the sell-off last week. Concerns over a European debt crisis after conflicting reports on a potential aid deal for Greece and rising oil prices boosted precious metals as a safe haven and store of value. The CBOE gold volatility index, a gauge of bullion investor anxiety, logged its largest twoday decline since late March. In other news, UBS said in a note that its physical gold sales on Monday were the second-highest so far this year.
Base Metals: Copper prices tread higher, extending its gains after hitting a five month low last week. However, gains were capped as traders remained cautious ahead of Chinese inflation figures today that could flag further monetary tightening measures in the world's leading raw materials consumer. Data from the General Administration of Customs showed China's imports of copper fell 13.7% to 262,676 tonnes in April from 304,299 tonnes previously.
Energy: U.S. crude oil futures fell in early trade yesterday after CME Group announced higher margin requirements. However, losses were reversed and crude ended the day up more than 1%. Crude was boosted by a rally in gasoline futures and strong trade data from China. Investors remained concerned that flooding along the Mississippi River may affect regional refinery operations and reduce gasoline output.
Currencies: The euro edged higher against the U.S. dollar and Japanese yen on Tuesday, but struggled to gain momentum on persistent fears that Greece may have to restructure its debt. A German member of parliament questioned whether Greece had met terms for its next aid tranche. A source said European Union and International Monetary Fund inspectors have not yet concluded whether Greece is meeting its targets.
