Commodities Boosted as Euro Rallied Despite Bailout and Downgrade News

Banking crisis in peripheral European countries has been under the spotlight and the latest update is that Moody's downgraded Span's credit rating by one notch while Ireland's government has prepared to bail out Allied Irish Bank and pump more capitals to Anglo Irish Bank. The euro plunged initially but recouped the losses shortly and extended the rally to 1.366 against the dollar. Yield spread between peripheral bonds and German buunds unexpectedly narrowed. Commodities remained firm with WTI crude oil surging to as high as 78.48 while gold making a new high at 1316.2.

After a 3-month assessment, Moody's downgraded Spain's credit rating to Aa1 from Aaa with a stable outlook, citing the country's economic outlook remained weak. The agency forecasts growth of about +1% per year on average over the 'next few years', compared with government forecasts that GDP will grow +1.3% in 2011, followed by +2.5% and +2.7% in 2011 and 2013 respectively. Concerning deficits, Moody's expected the country would reach its budget targets of 9.3% of GDP this year and 6% next year. However, it would be 'very difficult' to fall to 3% in 2013.

In Ireland, the central bank said that Anglo Irish Bank may need an additional of 6.4B euro from the government, following an injection of 22.9B euro in January 2009. The central bank said another 5B euro may be needed in case of unexpected losses. Meanwhile, Allied Irish Bank may need 3B euro from the government.

These were negative new but the market had anticipated the outcomes and sent Irish and Spanish yields to elevated levels over the past few days. Now that the dust is settled, at least in the near-term, and some traders may view current levels as good bargains.

Crude oil extended gains as the euro strengthened (USD weakened). Oil's appeal was also boosted at China's PMI suggested resilience in the country's economy. This upstaged worries that the Chinese government will accelerate the introduction of a trial property tax in some cities. Tightening measures to curb investments are usually negative for commodities.

Precious metals surged with gold climbing to a new record of 1316.2 and silver soaring to a 30-year high of 22.13. PGM also glittered with platinum rising to 1666, the highest level since May 2010, and palladium to a 2.5-year high of 574.7. The market anticipates US auto sales to expand rapidly in September. Consensus forecast that auto sales rose to an annual rate of 11.7M units in September, compared with 9.4M unit in the same period last year. PGMs should rise further if the data, to be released tomorrow, beats expectations.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

Other Topics