Crude oil weakens further in European session as driven by selloff in stock markets. Investors dump risky assets amid renewed concerns that Eurozone's sovereign crisis would damp economic growth. The worries overshadow surprising increase in Germany's confidence index. The market also take profits from yesterday's rally after realizing China's RMB measures may not benefit commodity demand as much as previously anticipated. WTI crude oil price plunges to 76.8 while Brent crude drops to 78.2.
Fitch Ratings announced yesterday that it cut BNP Paribas' rating by 1 notch to AA-, citing 'deterioration' in the bank's asset quality. This reminded the market problems in Europe are not yet over. Stocks fell in Asian and European sessions. In Asia, the MSCI Asia Pacific Index slid -0.9%. Japan's Nikkei 225 Stock Average lost -1.22% while Australia's S&P/ASX 200 Index fell -1.11%. In China, the Shanghai Composite added +0.1% at close. European bourses open lower today as led by financial shares. The slides are despite rise in Germany's Ifo.
The Ifo Institute reported German business confidence unexpectedly rose to a two-year high in June rose to 101.8 in June from 101.5 a month ago. The market had anticipated a drop to 101.2. The 'current assessment' reading also improved to 101.1 from 99.4 in May, compared with consensus of 100. However, the 'expectations' reading slipped to 102.4 in June from 103.7 in May. The fall was slightly deeper than market expectations of 102.7.
Currently trading at 1235, gold price edges lower in European session. The market has been speculating about the impact of increased flexibility in RMB on gold. In the near-term, the return to a more flexible currency regime may be negative for gold. The PBOC's statement signals a return to the managed floating regime with reference to an undisclosed basket during 2005 to 2008. This may risk RMB falling against USD should the euro continues to weaken. This scenario may reduce Chinese demand for gold. Part of the gold buying has been driven by tensions and trade conflicts between China and the US. With greater currency flexibility, this may reduce tensions between the 2 countries, at least in the near-term, and reduce gold buying.
While these may reduce gold demand, flight for safe-haven and low-rate environment should more than offset these 'negative' factors and lend support to the yellow metal.
In the longer-term, flexibility in RMB movement should lead to appreciation in the currency and the magnitude of appreciation will support China's shift of economic growth structure from exports to domestic demand. However, the impact on gold may not be too big. China is the largest gold producer in the world and is able to satisfy much of its own internal demand. Therefore, the notion that demand will be driven by rise in purchasing power is not very appropriate in the case. Increase in consumer demand as a result of RMB appreciation should only be marginal.