Crude oil weakens further in European session with the font-month WTI contract breaking below 76 (currently trading at 75.6), after surging to a 5-week high of 78.13 2 days ago. Brent crude also reverses earlier gains and slides to 77.8. The contract soared to 79.59 yesterday, the highest level since May 14. Apart from disappointing US economic data that raised doubts about energy demand in the world's biggest economy, comments from Bin Xia, an adviser from People's Bank of China (PBOC), about slowdown in China also hurt sentiment.
At a conference in Shanghai, Xia said that China's economy will slow down in the second half and it's unlikely to record double-digit growth for the full year. At the same time, he said that the Chinese monetary policy should return to a normalized level in the second half of the year. However, in the long-term, the overall economic development should remain strong and may catch or exceed that of the US by about 2030. Despite optimistic long-term outlook, the market worries that slowdown in growth will dampen oil demand in the medium -term.
Gold changes little after attempting to re-test the record higher yesterday. Yin Zhongqing, Vice Chairman of the finance committee of the congress, commented that China should increase its holdings of gold and oil in its reserve for diversification. However, this opinion may not be shared by others in the government. China's State Administration of Foreign Exchange (SAFE) said last week in its annual report that the 'relatively high volatility and costs of holding and trading gold' limit the metal's use for asset allocation.
G-20 leaders will meet next week and Chinese representatives urge to focus on debt crisis in the Eurozone rather than on RMB appreciation. Indeed, apart from the US, countries such as Brazil and India have urged China to adopt a more flexible stance in RMB in recent months. In a quarterly report released today, the World Bank also said 'more exchange-rate flexibility would make monetary policy more independent'. We expect the debate over RMB appreciation between China and other countries should benefit gold as the conflict raises geopolitical tensions. The same happened in 2009 and March 2010. Escalation in US-China trade and currency spats dampened China's demand for US Treasury (maybe as revenge) and spurred gold buying.
Concerning macroeconomic data, UK's public sector net borrowing (PSNB) increased less than expected to 16B pound in May from 10B pound. The market had anticipated a bigger rise to 18B pound. However, the data did not catch much attention as the focus has been shifted to the emergency budget on June 22.