Tuesday, November 30, 2010

Crude Oil Retreats amid Rate Hike Concerns in China

Heightened speculations on rate hikes in China have weighed on financial markets. Asian equities plunged amid worries that slowdown in Chinese growth will affect corporate profits while European bourses fluctuated between gains and losses. In the commodity sector, the front month contract for WTI crude oil fell after faltering below 86. Gold, however, climbed for another day to as high as 1377. Sovereign woes in the European periphery remained under the spotlight.

The market focus has once again turned to China. Zhong Jiyin, an economist with the Chinese Academy of Social Sciences wrote in China Daily that the country needs to raise interest rates by another 200 bps to curb inflation, given existing excess liquidity. Although the government has implemented a series of measures, including increasing RRR and raising margins for certain commodity futures, the impacts on inflation are not significant and CPI rose to 4.4% y/y in October, The market has been speculating that a rate hike can come over the next few weeks. According to Zhong, raising RRR may help ease the situation but is 'not enough to reverse it. The increase in the required reserve ratios for banks can prevent the rise of excess liquidity and ensure that the situation does not deteriorate further'. It will 'do little to get rid of the existing excess liquidity. Increasing interest rates is a common measure taken to check inflation'.

In Europe, it's obvious that the bailout for Ireland failed to stem contagion. The market currently expects the EU will need to rescue more peripheral European countries with Portugal being the one after Ireland. Indeed, apart from Portugal, CDS spreads and yield spreads between Spanish/Italian bonds and German bunds have continued to soar. According to Bloomberg news, Spain's banks may struggle to refinance about 85B euro in debt in 2011 and this may trigger the country to seek a bailout from EU/IMF.

China' rate hike and European sovereign concerns have dominated the headlines, overshadowing macroeconomic data. Germany's unemployment fell -9K to 3.14M, the lowest level since December 1992, in November. Unemployment rate stayed unchanged at 7.5%. We will have housing, manufacturing and confidence data in the NY session. Growth in S&P/Case-Shiller Composite 20 index may have eased to +1% in September. Chicago Fed will report its manufacturing PMI which probably dipped -0.7 to 59.9 in November. Consumer Confidence is expected to have improved to 52.7 in November from 50.2 in the prior month.

Posted courtesy of Oil N'Gold

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