Commodities Remain Pressured. European Debt Concerns Cloud Outlooks

Commodities continued struggling between gains and losses on Monday. The front month contract for WTI crude oil climbed above 85 as better-than-expected macroeconomic data from New Zealand and Japan came in better than expected. This triggered speculations for better demand growth in Asian markets. However, gains were pared as debt concerns in the Eurozone and rate hike concern in China remained. Gold traded narrowly with a soft bias. While the long-term prospect remains bullish for the yellow metal, the performance in near-term is clouded by debt problems and the possibility of bailouts in peripheral European economies, as well as global trade and currency tensions. The G-20 and APEC meeting held last week seemed to have achieved little to resolve the problems.

Market sentiment was lifted slightly as Japan's GDP grew by an annualized +3.9% in 3Q10 from a revised +1.8% in the prior quarter. Consumer spending showed impressive gains as households increased purchases of cars and other durables before expiration of government subsidies. However, net exports remained weighed down by the strong yen. While the data indicated Japan's economic recovery remained on track, it was driven by temporary factors. We expect the government will need to step up currency intervention, bringing the yen lower to help exports. Retail sales in New Zealand rose +1.6% m/m in September, compared with consensus of +1.1%, from a flat reading in August. The strength is also unsustainable as consumers brought forward purchases ahead of GST hike.

While these indicators may soothe investors' concern temporarily, the theme of the week continues to be an Irish bailout. Yield spread between peripheral European bonds and German bunds narrowed on Friday as EU officials said that they were in talks with Ireland to tap the EFSF for up to 48B euro. However, this was denied by the Irish government. According to a Finance Ministry official, while 'ongoing contacts continue at official level with international colleagues in light of current market conditions', 'Ireland has made no application for external support' and the government is 'fully funded till well into 2011'. The overhang should once again lift yield spreads. Worse still, problems in Ireland may have spread to nearby countries such as Spain and Portugal. While we do not envisage the same discussion about a break-up of the single currency as in May/June, the current situation should pressure the euro.

Similar to the G-20 summit held in South Korea, the APEC meeting over the weekend failed to formalize actions to resolve international trade imbalances. Leaders of APEC's 21 economies pledged to 'move toward more market-determined exchange rate systems' and 'refrain from competitive devaluation of currencies'. Moreover, advanced countries will 'help mitigate the risk of excessive volatility in capital flows facing some emerging market economies'. Still, there were no action plans decided on how to achieve the goals. Lack of confidence in currencies should send gold higher. After consolidation, the yellow metal will resume its uptrend and head for 1500.

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.

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