Selling Pressures Re-Emerged As Rate Cut Cheer Has Gone

Oil price's decline resumed after climbing more than $4 a barrel on Wednesday, the biggest gain in a month, as worries on recession re-emerged. US Commerce Department said yesterday that GDP contracted in 3Q. Moreover, Energy Department said that fuel demand in August fell 8.9% from a year ago. Currently trading at 63.51, we believe the recovery from 61.3 has finished at 70.6 and recent decline has resumed.

US GDP shrank by 0.3% in 3Q compared with the same period last year. It's the biggest slide since1980 as consumers and corporations cut spending on the fear that world economy may have entered a severe and long recession. It's expected that contraction would remain in force in 4Q as the bottom is not yet in sight. UBS sharply cut its 2009 oil price forecast by 43% to $60 a barrel from $105 because the global economic slowdown may reduce demand.

Capacity has to be cut aggressively to balance demand. Showa Shell said today it will cut its crude processing by 7% in Q4 as domestic demand is falling. Nippon Oil will continue processing less crude than a year ago. However, it seems to be difficult for oil producing giants to keep their promise in adhering to production quotas. Although OPEC members reached an agreement to reduce daily production and to strictly follow their assigned quotas, an increase in oil supplies of 0.5% was recorded this month because of higher exports from Iraq. The country supplied 31.85M bpd in October, an addition of 150 000 bpd from September. The increase offset the declines from Saudi Arabia, Kuwait and UAE during the period.

Survey showed that crude oil is expected to rise next week as speculators would bet for an increase in demand after interest rate cuts in the US and China. However, we view any rebound as a selling opportunity in short term.

Stock market tumbled again. The MSCI Asia Pacific Index retreated 2.2% to 86.32. The index soared more than 15% last few days as cheered by the US and China rate cuts. Today, Bank of Japan announced to cut overnight lending rate to 0.3% from 0.5%, in at attempt to follow global move. For the coming weeks, more countries will announce rate cuts. Economists expect the RBA to cut the official cash rate by 50 bps next Tuesday to 5.5%.

In European countries, confidence was weak as illustrated consumer confidence in UK and retail sales data in Germany. Retail sales dropped 2.3% in September from last month which was reported a rise of 3.1%, indicating economic growth is slowing down. In UK, October consumer confidence fell to -36, the lowest level since 1974. That means consumers do not feel prospective about the future and their willingness to spend decreased. All major European indices fell with FTSE down 1.51%, CAC down 1.83% and CAC down 0.51%.

Gold lost upward momentum and dropped to 725 Friday, after reaching our first target measured from golden ratio at 778.3. Although the precious metal has been treated as safe-haven, abrupt deterioration in economic environment made people concern about demand for gold. Besides oil price, UBS cut its 2009 forecast for gold by 15% to $700.

Dollar's strength dragged gold down. In European morning, Euro fell 1.24% against the greenback to trade at 1.2755 while the point plunged 1.62% against USD to trade at 1.6185 after surging in the past 3 days. There may be some reasons for today's dollar rally. Foreign investors who bought US stocks earlier sold USD as a hedge. Now, shares values of US stocks have fallen and traders need to purchase dollar to keep the hedge ratio constant.