Despite encouraging macroeconomic data, broad-based declines were seen in high-yield assets including commodities and equities. Investors worried that recent rallies have been overextended and have outpaced improvement in global economies. WTI crude oil plunged to -2.7% to settle at 77.46 after failing to test 80 while Comex gold slid to as low as 1130 before recovery. The benchmark contract ended the day at 1141.9, almost flat from the previous day.
Released yesterday, the Philly Fed index jumped to 16.7 in November, higher than market expectation of 12, from 11.5 in the prior month. Although initial jobless claims came in at 505K (consensus: 502K) while reading in the previous week was also revised up, the 4-week average continued to drop. Moreover, continuous claims also dipped -39K to 5.611M.
Economic data released in the US Thursday were solid but it failed to alleviate investors' worries, especially when some disappointing data, such as housing starts, were released earlier in the week. USD and Japanese yen surged against other high yield currencies. Against the euro and pound, USD rose+-0.3% and +0.6%. Commodity currencies got even bigger hits with AUD, NZD and CAD losing -1.2%, -2% and -0.8%, respectively.
Apart from dollar's strength, gold plunged as a report from the World Gold Council showed that demand (Identifiable end-use consumption excluding central banks) dropped -34% in 3Q09 as elevated gold price constrained consumption.
According to the Council, countries mainly contributed to the reduction in jewelry demand in Q3 2009 (-30% yoy) were India, Russia and Turkey (-42%, -52% and -55% respectively). ETF demand, at 41.4 metric tons in 3Q09, 'was robust on a historical basis but nevertheless marked a significant reduction on the 149.5 metric tons experienced in Q3 2008. Relative to Q2, the decline was -27%'.
Concerning demand outlook for 4Q09, the Council believed jewelry demand should continue to struggle due to the sky-high gold price. However, China will be the exception and its consumption should continue to grow healthy. For investment demand, high gold price will act as a driving factor for investors in Asian countries but may deter demands from India, Turkey and the Middle East. Official demand should continue to help boost price higher as central banks pursue diversifications of their currency reserves.
Today, we have a light economic calendar and prices also stabilize after a volatile day yesterday. The Bank of Japan will decide to keep its policy rate at 0.1% at today's meeting. While acknowledging economic recovery, the central bank will pledge to maintain the accommodative monetary policy so as to meet demand in financial markets.