Commodities extend weakness in European session amid growth concerns. We have a light calendar today and data released were largely better-than-expected. However, investors are unnerved and worried that growth cannot sustain. Crude oil remains soft after the yesterday's selloff while gold pulls back on profit-taking as the yellow metal soared to a 2-week high yesterday.

The National Development and Reform Commission (NDRC) announced on May 31, effective June 1, to cut domestic ex-factory prices of gasoline and diesel by RMB 230/ton and RMB 220/ton, respectively. The ex-refinery jet fuel price was also lowered by Rmb220/ton. The reductions were done as a result of recent decline in international crude oil prices. According to China's new pricing mechanism launched on December 19, 2008, prices of oil products will be adjusted if the 22-day moving average of international oil market (a mix of Dubai, Brent and Minas as a benchmark) changes more than 4%.

After the cut, June refining margins will drop and should drag down margins for 2Q10 when compared with the first quarter. Another thing we observed from this move is that NDRC reacts more timely with cuts than hikes. The last revision on fuel prices was a hike on April 13. In fact, after the price hike, the moving average broke above the -4% threshold from April 27 to May 14, yet the NDRC did not raise price. This indicated the government's concerns about inflation in China.

Headline CPI soared +2.8% y/y in April from +2.4% and +2.7% in March and February respectively. Although monetary tightening in China has been delayed due to uncertainty in sovereign crisis in the Eurozone, overheating economy remains a problem and will need to be addressed. This has an overhang pressuring commodities, especially base metals.

Base metals plunged yesterday(-0.6% to -5.5%) as China PMI missed market expectations and fell to 53.9 in May from 55.7 in the prior month, suggesting the government's cooling measures have shown impacts.

LME inventory trend remained mixed with copper stocks dropping -5.1% in May, the 3rd consecutive monthly decline, while zinc inventory has been rising since October 2009 and gained +10.9% in May.

PGMs have recently moved in tandem with base metals and energies, instead of gold, due to their heavy industrial applications. Platinum and palladium remain weak in European trading session after plunging yesterday. China auto sales growth slowed in May. Sales of cars, sport-utility vehicles and multipurpose vehicles soared +25% y/y to 885.8K in May, compared with a growth of +34% in April. We expect growth in car sales in both the US and Europe will decelerate in May and these are going to weigh on PGM prices. Upside catalyst for PGMs in the near-term is World Cup in South Africa as power diversion to commercial and residential areas may disrupt usage in mines and industrial areas.