Commodities Reverse Gains as China Raised Bank Reserve Ratio

People's Bank of China (PBOC) requires banks to increase reserve ratio by +50 bps effective February 25, as stated in its Website today. This is the second time this year the central bank raised banks' reserve ratios as a means to curb lending. On January 12, PBOC increased banks' reserve ratio for the first time since June 2008 as new loans reached a record of RMB 9.59 trillion in 2009.

In January, banks in China lent RMB 1.39 trillion, an amount exceeded the total of 4Q09 loans and represented 19% of the RMB 7.5 trillion target set by the government for 2010. China's CPI rose less than expected, by +1.5% yoy, in January. We stress yesterday that the slowdown was driven by seasonal factor - Chinese New Year holiday which is in February this year but was in January in 2009. In fact, the underlying inflation pressure is still picking up. We expect China's inflation should resume the uptrend in coming months. Therefore, bullishness in stock and commodity markets about slower inflation was unwarranted.

Economic growth moderated to +0.1% (consensus: +0.3%) qoq in 4Q09, following an expansion of +0.4% in the prior quarter. Also, preliminary reading shows that Germany's GDP growth was flat on quarterly basis in 4Q09, less than +0.2% as expected and +0.7% in the prior quarter. These are further signs that growth in the 16-nation region is losing steam. Earlier in Asian session, New Zealand reported that retail sales stayed flat on monthly basis in December after rising +0.8% a month ago. The market had anticipated an increase of +0.7%. The pace of growth has slowed down since late-09 as global central banks begin unwinding stimulus measures.

Gold almost erased all the gains made yesterday. Currently trading at 1080, the yellow metal fails to resist the broad-based decline in the commodity sector. Silver, platinum and palladium also reverse yesterday's rises.

In production news, Statistics South Africa reported decline in precious metal production last year. Gold production slid -8.8% yoy in December, translating to annual decline by -8%. PGM outputs fell -0.9% yoy in December and -8% yoy in full year 2009. PGM production is not expected to pick in the near-term as labor strikes and power outage occur in South Africa very often. Aquarius Platinum, the 4th largest platinum producer in South Africa, reported its half-year results to December 31, 2009 yesterday. The company posted net income, excluding one-off charges, of $3.9M, compared with a loss of $105.9M in previous year. The company also resumed dividend payment amid positive growth outlook. However, the CEO forecast full year PGM production will decline to 445-450K oz, compared with 490K-500K oz projected in August.