Investors' optimism after the Greek election proved to be short-lived as indicated by the selloff in the stock markets and other risk assets. The Fed extended operation twist trough the year end instead of adopting QE3 while the BOE decided of leave the size of asset purchases as it is although the voting results showed that the members were more divide. Absence of aggressive monetary stimulus announced by central banks also intensified concerns over the path of global economic recovery. Financial markets were lifted on Friday on bargain hunting and the ECB relaxed terms for collateral. There were also increasing speculations that the central bank would announce another set of long-term loans.
Financial markets were pressured for most of the week as investors realized that victory of the pro-bailout party with a pro-bailout coalition government in the Greece would not resolve the sovereign debt crisis in the Eurozone. G-20 leaders failed to come up with solid solution to the problems although they pledged to help. Emerging economies committed more money to the IMF's rescue fund but the market reactions were mild. A recovery was, however, seen on Friday amid bargain hunting after weeks of weakness in the financial markets. Meanwhile, the sentiment was also lifted by the ECB's move to ease conditions of collateral.
The ECB, in order to make it easier for banks to borrow money, announced to lower the minimum rating threshold for mortgage-backed securities to BBB- from A-. According to the statement, the asset-backed securities will become eligible collaterals: 1) auto loan, leasing and consumer finance ABSs and ABSs backed by commercial mortgages (CMBSs) which have a second-best rating of at least "single A" in the Eurosystem's harmonized credit scale, at issuance and at all times subsequently. These ABSs will be subject to a valuation haircut of 16%; 2) residential mortgage-backed securities (RMBSs), securities backed by loans to small and medium-sized enterprises (SMEs), auto loan, leasing and consumer finance ABSs and CMBSs which have a second-best rating of at least "triple B" in the Eurosystem's harmonized credit scale, at issuance and at all times subsequently. RMBSs, securities backed by loans to SMEs, and auto loan, leasing and consumer finance ABSs would be subject to a valuation haircut of 26%, while CMBSs would be subject to a valuation haircut of 32%.
Crude Oil: Crude oil prices plunged for a second consecutive with the front-month WTI crude closing below 80/bbl for the first time since September last year. The equivalent Brent crude contract breached the 90 level at one point before ending the week at 90.98. The change of term structure (to contango) of Brent crude forward curves suggested the weakness in crude fundamentals. Global macroeconomic uncertainty has been the key reason sending the price lower. However, the recent sell off in oil prices has probably overextended. For a long period of time, stocks and crude oil prices have displayed significant positive correlation. However, the recent decline in crude oil prices has significantly derailed from the normal path, suggesting the S&P 500 index would have to fall to a bigger extent and the US economic outlook would have to deteriorate further to justify the fall in crude oil prices.
Meanwhile, the selloff in crude prices might have unnerved oil producing countries as the breakeven prices are being approached. If the decline continues in coming weeks, we expect the OPEC would implement some price defending measures, i.e. production cuts.
Natural Gas: Nymex natural gas gained rose for a second week as US inventory increased less than expected. Moreover, the National Hurricane Center forecast there is an 80% chance that a tropical depression or Tropical Storm Debby will be formed around the Gulf of Mexico during the weekend. The DOE/EIA recorded that gas stockpiles increased +62 bcf to 3006 bcf in the week ended June 15. Stocks were +680 bcf higher than the period last year and +641 bcf, or 27.1%, above the 5-year average of 2365 bcf. Separately, Baker Hughes reported that the number of gas rigs dropped -21 units to 541 in the week ended June 22. Oil rigs increased +16 units to 1 421 and miscellaneous rigs stayed at 4 units and the total number of rigs was down -5 units to 1 966 units. Directionally oriented combined oil, gas, and miscellaneous rigs stayed unchanged at 233 units while horizontal rigs increased +3 units to 1 165 and vertical rigs slid -8 units to 568 during the week.
Precious Metals: Gold was not able to regain its status as the safe-haven asset and fell below 1600 again as hopes of QE3 dissipated. The Fed announced after the two-day meeting that it would extend its Operation Twist program through to end 2012. It has committed to sell Treasuries with remaining maturities of 3 years or less while simultaneously purchase an equal amount of US Treasuries with remaining maturities of 6 to 30 years. The total amount would be worth of $267B based on the current trend. Policymakers remained dovish in the economic outlook and viewed that 'low rates of resource utilization' and 'a subdued outlook for inflation over the medium run' would 'warrant exceptionally low levels for the federal funds rate at least through late 2014'. Meanwhile, the central bank pledged to 'take further action as appropriate to promote a stronger economic recovery.
The move disappointed those investors who had hoped that the Fed would expand the balance sheet. The next trigger for gold price to move higher would be the "fiscal cliff" at the year end. By that time, expiry of a range of tax cuts would likely hurt consumer spending. According to the Fed chairman Ben Bernanke, "the so-called fiscal cliff would, if allowed to occur, pose a significant threat to the recovery". The fed might by that time feel the urgency to announce more aggressive accommodative measures to boost the economy.
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