Market Commentary
Key Notes: Rising inflation in Asia was the theme yesterday. Chinese consumer price inflation in May accelerated to a 34 month high of 5.5%. In India, the wholesale price index inflation was also well above forecasts at 9.06%. Emerging economies face a challenging task ahead of managing inflation even as growth cools and the U.S. economy loses steam. Subsequent to the release of Chinese inflation data, China’s central bank raised reserve requirement ratios for the ninth time since October.
Ahead, we will receive U.S. industrial production and consumer price inflation (CPI) figures. Based on a Reuters poll, industrial production is expected to increase 0.2% while CPI is likely to edge up a mere 0.1%. Tame inflation and positive industrial production figures could enable commodities to extend their rally from yesterday. Currently, gold has a strong positive correlation with commodities (25 period correlation with the Reuters-Jeffries CRB Index stands at 0.78) and a rally in commodities is likely to boost gold prices as well.
Market Summary
Precious Metals: Gold snapped a two day losing streak, rising about 0.5% as inflationary concerns boosted demand for gold as a store of value. Consumer price inflation data showed inflation accelerated in China to the fastest pace in three years. Sentiment in the gold market was also buoyed by Bernanke’s comments. Bernanke said in the absence of a quick resolution to the battle over the debt limit, the United States could lose its prized AAA credit rating and the dollar's status as a reserve currency could be impacted.
Base Metals: Copper surged almost 3% yesterday. This is its biggest rally in nearly three months. China's industrial output increased 13.3% y/y in May. Better-than-expected U.S. retail sales report also increased risk appetite as industrial metals rallied across the board. Data also showed China's refined copper output dropped 3.3% in May after falling 3.4% in April, due to reduced supply of scrap and the country's power shortages.
Crude Oil: U.S. crude oil rebounded as positive industrial production figures from China eased some growth concerns. China's implied oil demand in May topped the 9 million bpd mark for the seventh month in a row, signaling strong demand from the world’s 2nd largest consumer. Crude oil extended gains in post-settlement trading after The American Petroleum Institute reported that crude stockpiles fell 3 million barrels for the week to June 10. This was double the expected decline of 1.5 million barrels.
Currencies: The euro edged up against the dollar for a second day as encouraging economic data prompted an increase in risk appetite. However, uncertainty over the new bailout package for Greece capped gains in the common currency. Investors remained cautious as the private sector could be involved in a new financial aid package. Debt issued by peripheral economies were under broad pressure as Greek, Portuguese and Irish 10-year bond yields hit fresh euro lifetime highs.
