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Risk appetite diminished markedly yesterday as disappointing US economic data fueled slowdown concerns. Equities plunged in both Wall Street and European markets. DJIA and S&P 500 Index fell -0.66% and -0.69% respectively while European bourses (FTSE, DAX and CAC 40) slipped more than -1%. In the commodity sector, the front-month contract for WTI crude oil price broke below 110 for the first time in 2 weeks and closed at 109.24, down-1.63%, while the equivalent Brent crude contract ended the day at 121.19, down -1.03%. The more severe fall in WTI crude than Brent crude was due to huge US stock-builds last week. Precious metals also declined. Despite the safe-haven appeal, gold plunged for a second consecutive day amid the broad-based selloff in the commodity sector and the massive liquidation in silver. We, however, retain bullishness in gold's long-term outlook. The 78B-euro bailout for Portugal is a reminder of the unresolved sovereign debt crisis in the European periphery. This should be supportive for the yellow metal.
Recent US data appeared to have lost momentum. ISM non-manufacturing Index surprisingly fell to 52.8 in April from 57.3 in March. The market had anticipated mild improvement to 57.4. Breakdowns of the report were also fragile with the 'orders' component slumping -11.4 points and the 'employment 'component' missing expectations and dipping -1.8 points. Separately, the ADP estimated that payrolls increased +179K in April, easing more than expected from a +201K gain in the prior month. Weakness in economic developments may challenge the stance of hawkish members in the Fed. Dallas President Richard Fisher stated that 'higher gas and commodities prices have not translated into more general price numbers'. Yet, policymakers will 'not become complacent on this front' and he will 'be among the first to advocate the unwinding of some the stimulus' when necessary. John Williams, speaking for the first time in his capacity as the San Francisco Fed President, said a period of high inflation is 'very unlikely'. Williams is considered as a dove but he's probably less dovish than his predecessor Janet Yellen who is now FOMC's Vice Chair. The likelihood for leaving monetary policies accommodative should normally negative for USD. Yet, the greenback made little change after all these comments. We believe this reflects risk aversion which spurred demand for safe-haven investments (USD is consider a save investment compared with high-yield assets).
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Weakness in gold was mainly a result of the broad-based decline in the commodity sector and the massive selloff in silver. The white metal, tumbling over the past 3 days, has recorded the biggest slumped since 1983 as CME has aggressively raised margin requirements recently. The exchange said that the minimum amount of cash that must be deposited when borrowing from brokers to trade silver futures will increase to $21 600/contract effective after May 9, up from $16 200/ contracts. The CME has increased margin requirements for silver trading for 5 times since April 26. Technically, the selloff may have further to go after the break of the psychological level of 40.
The key events for today are ECB and BOE meetings. For the ECB, while it's widely expected that the main refinancing rate will stay at 1.25%, the market awaits details in the meeting statement and the press conference. President Trichet's comment may provide guidance on the next rate hike. Our economists expect to see the next tightening in June. For the BOE, the struggle between boosting growth and combating inflation remains. The decision for this meeting will likely be no change in both the policy rate and the asset-purchase program, although the central bank usually announces new policy in the month that the quarterly inflation report is released.
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