Despite mixed US data, Wall Street rallied as investors remained thrilled by strong trade data in China and encouraging bond auction result in Spain. Surge in risk appetite also boosted crude oil prices. The front-month WTI contract rose for a 3rd consecutive day to a 4-week high at 76.3 before settling at 75.48, up +1.49%. Brent crude also gained +1.54% and closed at 76.86. In Asian session today, we see pullbacks in both contracts amid profit-taking.
Gold plunged on improved market sentiment and comments by China's State Administration of Foreign Exchange (SAFE) that gold's use for asset allocation is limited given its relatively high volatility and costs of holding and trading. Closing at 1222.2, the benchmark contract for gold slid -0.63% Thursday, following a drop of -1.26% on the prior day. The contract hit a record high of 1254.5 on June 8. We expect the yellow metal's uptrend to remain intact despite the pullback as investment demand and flight for safe haven would help support the rally.
US initial jobless claims dropped only -3K to 456K in the week ended June 4, compared with market expectations of a sharper fall to 447K. The 4-week moving average rose +3k to a 6-week high of 463k. Yet, continuing claims plunged substantially, by -255k, to 4462k, the lowest since December 2008. The Labor Department did not give reason for the unexpected drop but this reading is worth monitoring.
US trade deficits widened marginally to -$40.3B in April, from -$40B in March, with both imports and exports slipping. Specifically, trade gap with China grew to -$19.3B in April from -$16.9B a month ago. Treasury Secretary Timothy F. Geithner again urged China to allow appreciation of RMB as the current exchange-rate policy hinders global economic recovery. We believe gold should benefit if RMB appreciates as the yellow metal will become 'cheaper' in RMB-terms and this should attract domestic buying. Moreover, if revaluation of RMB is regarded as a government means to contain inflation, in other words the government admitted inflation has become detrimental to the well-being of the economy, gold should outperform.
Indeed, inflation has been a problem in China for sometime this year and the government will step up the cooling measures sooner or later. Headline CPI rose +3.1% y/y in May, exceeding the government's upper range of +3%. Other data were also strong with fixed asset investment surging +25.9% (consensus: +25.7%) in the first 5 month through May, compared with +26.1% in the first 4 months while retail sales soaring +18.7% y/y, after +18.5% rise in April. Given the set of strong economic data, the government is poised to implement further measures to cool down growth and curb inflation.
The ECB and the BOE maintained the policy rates unchanged at 1% and 0.5% respectively. While the latter released a short statement as usual, the formed received lots of questions regarding the bond purchase plan and re-launch of refinancing operations. ECB President Trichet did not give much detail about the bond purchase plan but announced extension of the 3-month LTRO for another 3 months. ECB staff raised GDP forecasts for 2010 to +1% from +0.8% but lowered that for 2011 to +1.2% from +1.5%. Inflation outlook for 2010 and 2011 were revised up to +1.5% (previous: +1.5%) and +1.6% (previous: +1.5%) respectively, driven by surge in energy prices and decline in euro.