Risk appetite remains robust in European session. Although the euro, equities and commodities were down modestly amid concerns over Spanish banking systems, prices recovered as the central bank of Spain said it might publish results of the stress test to the public. Currently trading at 77.3, the front-month WTI contract is down -0.35% from yesterday's close. Price slid to as low as 76.78 earlier in the day.

Latest development regarding Gulf of Mexico (GOM) oil spill is that BP and the US government reached a preliminary agreement that the oil company will set aside $20B to cover the economic damages of the GOM oil spill. BP has also started a new containment cap system to increase overall collection capacity to 28K bpd from around 15K bpd. BP shares, however, rebounded almost +10%, the biggest increase since November, yesterday after the agreement and the company decided to halt dividend and sell assets to meet the liability. Jump in BP shares also boosted stock markets.

Although correlation between crude oil and equities has risen since elevation of sovereign crisis woes in the Eurozone, we have seen the correlation dropped marginally in recent weeks. This might have been driven by worries about supply disruption as the US announced a 6-month moratorium on deepwater drilling. We believe the overall impact of the new measures on production is limited if the drilling ban ends 6 months later, given the high inventory level and huge spare capacity in the country. However, the overhang is if the government will extend the moratorium beyond 6 months. After all, the Gulf of Mexico accounts for more than 50% of the undiscovered hydrocarbon resources in the US.

 

Gold continues to trade within a range of 1220 and 1340. We expect resumption of uptrend after consolidation as global low-rate environment and deficit concerns in the Eurozone should driven demand for the yellow metal. Although recent economic data suggested economic recovery in the US, the world's largest economy, has remained intact, the Fed will likely keep its policy rate low for an extended period. This should benefit gold as the opportunity cost of owning gold is lower. The following chart indicates that real US interest rates are inversely correlated with gold price.