Markets in Fright, Focus On G7's Trick Or Treat

OnG 10 October. As we mentioned yesterday, gold's pullback was just temporary as worldwide panic favors precious metals' investment. Today, the gold futures for December delivery broke last week's high at 932 and reached 936.3. We remain bullish on gold and believe upside momentum will continue for targets of 989.6 and 1033.9.

Gold's safe-haven quality shines as the world floats into recession. The coordinated rate cut action failed to reverse recent selloffs in stock markets. DJIA's weakness extended further and dropped 7.33%, or 679 points, Thursday. The Standard & Poor's 500 Index also slid 7.6% to 909.92 yesterday, capping a seven-day decline, the longest losing streak since 1996. The bearish sentiment was followed by Asian market today. The MSCI AP index headed for its worst week as Japan's Nikkei 225 Stock Average dropped 9.62%, Australian stocks fell 8.3% while Hong Kong's Hang Seng Index fell 7.2%.

The US dollar firmed against Euro (1.3559) on the eve of G7 meeting in Washington to discuss what the countries can do to overcome the crisis. The conference will bring together the top finance officials of the United States, Germany, Japan, France, Britain, Italy and Canada. All eyes are on this emergency meeting and the decisions thereafter. Any disappointing measure would aggravate the already-saddened investors. The options being considered include guarantee of lending between banks, capital injection into banks and purchase of stakes in a wide range of banks, providing insurance to all US bank deposits and further rate cuts. Other issues such as regulations on executive pay, liquidity buffers and financial instruments are also important topics.

However, it may not be practical for the countries with different traditions, styles and strategies to adopt identical policies. Mistrust is set to persist. Moreover, some of the strategies might create additional systemic risks.

At the same time, IMF offered to lend money to countries that were hit by credit crunch. The loan, which had fallen to $17B as of Sep 30 from $110.2B in 2003, is available for the 184 member nations. The association has also activated a financing mechanism which was first used in Asian crisis in 1990s. With the program on, borrowers are allowed to access the fund in 10 days or less, rather than the usual several weeks.

On the other hand, crude oil (November futures) tumbled to $81.13/bbl, one-year low, in European session after the collapse in global equity markets overnight. The recession now threatened to go global. It's expected global GDP would fall below 3% in 2009 while industrial growth would be flat. Although emerging markets are expected to contract less severe, financial shocks and tightening policies would dampen growth. As the black gold has broken key medium support at 85.42, we expect further weakness to 75.37 (61.8% projection of 147.27 to 90.51 from 110.45) is not unlikely despite OPEC's '$80-defense' actions.

According to BNP Paribas, oil market is still searching for a bottom as global financial turmoil is far from settling. (I think it's just the beginning!). The biggest bank in France cut its forecast for 2009 US oil prices by 18%, citing a downgrade of economic growth to -0.1%.

In its monthly report, IEA cut its forecast for global oil demand next year by 0.5% as we are now facing the worst financial situation since the 1930s. The agency lowered its 2009 projection by 440 000 bbls/bbl to 87.2M bbls/day. Non-OPEC supply growth this year has been “largely wiped out” after hurricanes in the Gulf of Mexico and pipeline disruptions in Azerbaijan.

OPEC finally confirmed an emergency meeting on Nov 18 to discuss about global financial crisis' impact on the oil market. The cartel is expected to cut oil production after drastic decline in oil price. The last time OPEC announced an official reduction in oil production was in September. The member countries agreed to trim output by 500 000 bbls/day.