Financial markets extend Friday's decline despite European leaders' attempt to downplay Hungary's fiscal problems. The euro weakens further to 1.88 after slumping below 1.2 against the dollar while WTI crude oil breach below 70 again. Base metals slide while precious metals will heavy industrial uses, i.e. platinum and palladium, get hammered. Safe-haven assets such as USD, JPY and gold remain as risk appetite soar. We have light calendar today but speeches from BOC Governor Carney, Fed Governor Bernanke will catch market attention.
Hungary's new government said there's no risk of default in the country as global market tumbled after the comment last week that Hungary has a 'slim chance to avoid the Greek situation'. Mihaly Varga, Orban's chief of staff and a former finance minister said Any comparison with countries that have much higher credit default swap ratings than Hungary is unfortunate ... The comments that have been made about this issue are exaggerated, and if they come from colleagues that's unfortunate'. Both the IMF and the EU were surprised by the comment while Moody's said 'Hungary isn't the next Greece' and the country has 'a good track record of doing what it needs to do when in trouble'.
Yet these 'soothing' comments fell on deaf ears and investors dumps the single currency and risk assets amid concerns over worsening sovereign crisis in Europe. Hungary is a member of the EU but does not use the euro. Yet, deficit problem in the country reflects weakness European nation and affects the euro. Hungary's debt was 78% of GDP in 2009, the highest among the European Union's newest members. Yet, the figure was just slightly higher that EU average of 74% and far below Greece's 115%.
Global economic recovery is threatened as global leaders focus on fiscal consolidation which will likely dampen growth. At the G-20 summit held last week, policymakers agreed that while 'the global economy continues to recover faster than anticipated...the recent volatility in financial markets reminds us that significant challenges remain and underscores the importance of international cooperation'. Recent crisis in the Eurozone highlights 'the importance of sustainable public finances and the need for our countries to put in place credible, growth-friendly measures, to deliver fiscal sustainability, differentiated for and tailored to national circumstances' and 'countries with serious fiscal challenges need to accelerate the pace of consolidation'.
Market sentiment has clearly worsened after a short-lived rebound last week. While commodity prices may recover after the sharp selloffs today and last Friday, near-term outlook remains vulnerable.
The RBNZ, the ECB and the BOC will meet for rate decision this week. While consensus forecast the RBNZ will raise its policy rate by +25bps to 2.75% at the meeting, the central bank will likely warn the market of uncertainty of global economic outlook. Both the ECB and the BOC will keep interest rates unchanged but the market will like to see any further measures to contain the crisis.
Commitments of Traders
Crude Oil: Net speculative long positions plunged by -40% to 24.9K, the lowest level since August 2009. Longs dipped -1.55K while shorts surged +14.0K, indicating traders' lack of confidence over oil's outlook
Natural Gas: Net speculative short positions slid for a 4th week as driven by speculations on stronger demand amid a hotter-than-average summer and lower output due to an abnormal hurricane season. The National Oceanic and Atmospheric Administration (NOAA) said that the hurricane season (June 1 to November 30) in the Atlantic in 2010 has an 85% probability of being above normal, with 3 to 7 major Category 3 hurricanes.
The US energy Department, based on NOAA's forecast of 1 to 3 major hurricanes in 2009, estimated production cuts of around 4.5 mmb of crude oil and 36 bcf of natural gas production in the Gulf of Mexico. Extrapolating the figures, crude and natural gas production may be reduced by 10-11 mmb and 90 bcf respectively, during the hurricane season this year.
Gold: Net speculative long positions dropped over -3K to 224.5K. Yet, this does not indicate waning demand for gold as safe-haven. Indeed, investment demand for gold ETFs remains robust. Holdings in the SPDR Gold Trust stayed at record high level despite dipping on June 4 for the first time since April 22.
Silver: Net speculative long positions recovered mildly as decline in short positions exceed the drop in long positions. Net longs should, however, fall in the coming week as traders disfavor the metal amid fresh worries over global economic recovery.
Platinum: Net speculative long positions were largely flat from the previous week. Both long and short positions increased modestly, suggesting bullish and bearish opinions about the metal's outlook are balanced.