Commodities were in a consolidative mode yesterday, weighed down by the impasse of the US debt ceiling negotiation and concerns about the European debt problems with the focus now turned to Italy but then gained support on better-than-expected US jobless claims data. The front-month contract for WTI crude oil price slipped to 96.51, the lowest level since July 19, before ending the day flat at 97.44 while the equivalent Brent crude contract remained at the recent narrow trading range through the day. Gold price initially dropped to as low as 1602.8 as the US dollar rebound but the metal managed to recover and ended the day almost flat at 1613.4.
House Speaker John Boehner called off a vote on his plan for raising the US debt as it failed to gain enough support within the Republican Party. However, if the vote ever happens, Senate Majority Leader Harry Reid has stated that the plan will be 'dead on arrival' while President Barack Obama has threatened to veto the plan. Fears that the lawmakers may not be able to reach a deal by the August 2 deadline approaches intensified. Meanwhile, the government has been making contingency plan to avoid a default even if no agreement is reached by that time. It's said that the US Treasury will give prioritize interest payments to holders of government bonds before other government spending. It's estimated that over 500B of debts will mature in August.
In the Eurozone, peripheral yield spread widened amid the lack of confidence that the new funding measures announced last week would resolve the sovereign debt crisis. Italy's bond auction was not as successful as expected. Sales of 2.7B euro of the 10-year bond were below the target of 3B euro. The yield was 5.77%, higher than 4.94% the same securities were sold in June 28. Investors worried that, with interest rates approaching 6%, Italy may not be able to tap funding from the public and eventually turn to the EU/IMF for bailout. Separately, S&P downgraded the credit rating of Greece by 2 notches to CC, after Moody's 3-notched downgrade on Monday, as 'the proposed restructuring of Greek government debt would amount to a selective default'. The proposed restructuring is a 'distressed exchange' because it is likely to result in losses for commercial creditors'.
Economic data released overnight did help support the market modestly. US' initial jobless claims fell to 398K in the week ended July 23 from 418K in the prior week. The market had anticipated a smaller drop to 412K. Pending home sales surprisingly climbed +2.4% m/m in June, against consensus of a -2.0% fall, following a -8.2% gain in May.