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Risk sentiment remained firm as US initial jobless claims fell more than expected last week while trade deficits narrowed. Wall Street strengthened with DJIA and S&P 500 climbing +0.27% and +0.48% respectively. Both indices soared more than +0.5% in early trading session but gains were pared as details of the data were not as bullish as the headlines suggested. Crude oil initially rose and jumped to a 3-week high of 75.96 after a report showing inventory draws.
However, gains were erased on profit-taking and OPEC's downward revisions on 2010 GDP growth forecasts and world's demand for the cartel's output. The front-month WTI contract ended the day at 74.25, down -0.56%. Gold plunged after failing to break above the record high of 1266.5. While gold purchase from the central bank of Bangladesh sent a positive signal of official demand, the amount was too small to have significant impact on prices. The benchmark Comex contract for gold fell to as low as 1243.5 before settling at 1250.9, down -0.52%.
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Employment data has been under the spotlight in recent months as the Fed expressed its concerns about the US job market and its health should be a key determinant of the Fed's policy stance. Jobless claims data beat market expectations for a second week although it was again distorted by Census-related layoffs. Initial jobless claims dropped -27K to 451K (consensus: 470K) in the week ended September 4. Yet the data may look better than it should be as 9 states did not file claims data due to the Labor Day holiday. The 4-week moving average which dropped -9K to 478K probably delivered a picture closer to reality: a sluggish job market.
Another data that boosted sentiment was US' trade deficits which narrowed to $42.8B in July from 49.9B. The market had anticipated a mild drop to $47.6B. The decline was indeed driven by a -2.1% drop in imports and a +1.8% rise in exports. In our opinion, slump in imports indicates weakness in consumer spending.
The US Energy Department reported declines crude, gasoline and distillate inventory levels for the week ended September 3. However, the disappointment was that gasoline demand dropped in the last week of the summer driving season. It's possible for consumption to weaken further as we enter the shoulder season.
Meanwhile, OPEC said in its monthly report that world economy will grow by +3.9% in 2010, followed by a slowdown of +3.6% in 2011 (August projection: +3.7%). The downward revision was due to deceleration in OECD economies while developing countries continue to expand. While leaving global oil demand forecasts unchanged for 2010 and 2011, demand for OPEC crude was lowered by -0.1M bpd and -0.2M bpd for 2010 and 2011 respectively as non-OPEC production increased.
Gold slipped as risk appetite increased and investors sought for higher-yield investments. The IMF said that the central bank of Bangladesh bought 10 metric tons of gold at about $403M. The world lender said the purchase was conducted on the basis of market prices. While the purchase reinforced our view that official demand for the yellow metal remains strong as a means of asset diversification and/or a store of value, the amount is too small to trigger significant price movement. In the near-term, gold price will continue to be driven by macroeconomic uncertainty and renewed sovereign concerns in European countries. If these worries abate, gold has chance to weaken further.
