World markets got out of control and panic selling was seen everywhere last week, especially on Friday. We saw the domino effect in stock markets, commodity markets and currency markets as investors liquidated their positions for cash. Until now, we are not able to see the end of these activities. For the week, Dow was down 5.35% while S&P 500 and Nasdaq were off 6.78% and 9.31 % respectively. In Europe, The FTSEurofirst 300 index of top European shares fell 7.3% over the week, and has lost 22 percent in October. In Asia, most indices ended the week with more than 10% decline. For commodities, the RJ/CRB commodity Index fell 9.3% to settle at 256.00 Friday.
Next week, the FED will meet together to discuss about interest rate. So far, interest rate futures indicated there's a 20% chance for an aggressive cut of 75 bps. If that's the case, the rate will be below 1% and widening of the gap between USD and Euro yields would be negative for the dollar.
Crude Oil
OPEC's decision on a production cut of 1.5M bpd did not even cause a short-term rebound in oil price. Instead, it exacerbated recent decline and pushed price to 16-month low. On Friday, WTI crude oil for December delivery plunged to as low as 62.65 before settling at 64.15 (-5.4%) due to oversold condition. For the entire week, the futures contract fell 10.7% or $7.7/bbl.
Since the collapse of Bear Stearns several months ago, we were warned of US economic slowdown. After the collapses of Fannie Mae, Freddie Mac, Lehman Brothers, we realized the seriousness of financial crisis/ credit crunch. Then with the emergence of bailout plans in US, Europe and now in emerging countries such as S. Korea, we have to face the fact that recession was not just happening in OECDs but is spreading to developing countries, which means the notion of 'decoupling' failed. Last week, China reported Q3 GDP growth of 9%. It's the weakest level in 5 years. Lower growth implied reduced demand from this second biggest oil consumer in the world.
The market's concerns proved to be eligible as stockpiles increased in consecutive weeks. Last Wednesday, EIA reported the weekly petroleum inventory which showed that crude stocks were up 3.2 M bbls, gasoline stocks rose 2.7 M bbls and distillate stocks rose 2.2 M bbls. All were higher than analysts' estimates.
Rapidly decline in demand proved previous forecasts too optimistic. The International Energy Agency (IEA) slashed it forecast on oil demand. It now expects global oil demand to average 86.5mm/d in 2008 (+0.4mmb/d against 2007) and 87.2mmb/d in 2009 (+0.7mmb/d). Deutsche Bank cut its 2009 and 2010 crude oil price estimates by 35% to $60 a barrel and 43% to $57.50 a barrel, respectively.
Recent drastic selloffs were due to more than just demand and supply issues. Investors were in panic and they preferred dumping all investments for cash during times of recessions. Besides crude oil, other commodities, stocks and high-yield currencies all got hammered as investors lost risk appetite.
As it takes times for both economy and investors' confidence to recover, oil price's outlook remains bearish in coming weeks and months. While it's likely for the benchmark contract to recover next week, upside is far from meaningful and should be capped below 70. Resumption of recent downtrend should then be seen and weakness to 60 and 55 seems unavoidable.
OPEC's cut announced Friday after the 2-hour meeting in Vienna marked the beginning of production cycle in the coming 12 months. According to some analysis, in order to defend oil prices, the cartel will need to cut output by 4-5M bpd. Therefore, in coming meetings (the next one in December or earlier), OPEC should continue cutting quotas, with 1-1.5M bbls each time.
Natural Gas
Following oil, natural gas price tumbled to as low as 6.15 before settling at 6.24. Over the week, natural gas fell by 8.6% on concern demand for energy will decline as the world economy slows.
Despite the heating season, gas inventory advanced 70B cubic feet in the week ended Oct 17 to 3.347 trillion cubic feet. Supply is higher than five-year average of 3.327 trillion cubic feet. Price should continue to go south and test the $5.30 level formed in August 07.
Gold
Ignoring its safe-haven quality, investors continued to dump gold for cash. The precious metal for December delivery slided to as low as $681/oz on European morning Friday along with crude oil and world equity market selloffs. However, as better-than expected US housing data was released, re-emerged buying helped gold settle at 730.3(+2.2). On weekly basis, the metal fell by 7.3%.
USD's strength greatly reduced gold's appeal as an inflation-hedge. The dollar rallied against major currencies except yen over the week. Dollar Index rose 4.9% last week, the most since September 1992. It touched 86.97 Friday, the highest since October 2006. The dollar appreciated 6% to $1.2623 against euro this week as the market generally believed ECB would speed up rate cuts to combat weakening economy. In UK, 3Q GDP contracted for the first time since 1992 and sterling dropped 8% against the greenback. Canadian dollar also got hit and touched C$1.2842, the lowest since Sept. 23, 2004. It has declined 17% since September. Decline in crude oil price was one determining factor as oil export accounted for 10% of the nation's total export revenue.
Recently, we have seen the flight from high-yield assets to low-yield one for safety's sake). Therefore, the dollar strengthened. Yet, it's weaker than yen which rose 7.8% to 94.32 against USD last week.
Another major reason for gold's weakness was decrease in physical demand as institutional investors continue liquidating positions. Physical gold holdings in the SPDR Gold Trust ETF fell to 747.1M tons last week after reaching an all time high of 770 tonnes in the middle of October.
For the week ahead, gold's outlook is biased to the downside and 780 should capped rebound from the low at 681. Although we are bullish on gold in the long term, we believe recent decline remains in progress and 640 as first support.
Silver
Silver price dropped on expectation that industrial consumption would decline due to economic slowdown. The benchmark futures fell 2.2% Friday and lost 1.3% last week. For the coming week, silver should continue to trade within the downtrend from 13.88 and weakness to 8.48 cannot be ruled out.
Platinum
Platinum closed at 802.3 last week, a loss of 8.9% on weekly basis. There have been worries on the demand for platinum as the US reported a fall of 27% in auto sales in Septembe. In Europe, car sales slumped also 8.2% in the same month.
Some miners commented at current price level, it's likely for many mining projects to be closed down. This is the only positive catalyst for the metal's price in near term.
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