The EU, the IMF and Greece finally agreed on a deal that provides 110B euro of funding to Greece over the next 3 years. The package, of which 80B euro will be contributed among EU members at a rate of around 5% and the rest by the IMF, is subject to parliamentary approval in the EU on May 7.
In return for a large sum of money with the first payment before Greece's next bond redemption on May 19, Greece agreed to step up its fiscal tightening policies. In addition to the measures already announced and implemented, the Greek government pledged to cut budget by 30B euro (13% of GDP) through reducing wages, freezing pensions, raising taxes, cutting public investments and cutting civil servant positions.
Greece's deficit is at 13.6% of GDP in 2009. The government expects it will reduce to 8.6% in 2010 and eventually to below 3% by 2014, a year later than previously planned.
The market initially was boosted by the news as near-term risk of default has been eliminated. The euro rose to 1.333 against the dollar but then slid as there're worries that the bailout plan may not be approved by the parliament and the current deal may set a precedent for further bailouts.
WTI crude oil price traded in similar pattern with the front-month contract initially rallied to a 3-week high of 86.79 before pullback. The contract is currently trading at 86.15, unchanged from Friday's close.
Gold price changes little but remains near 5 months' high. We will not feel surprised to see the yellow metal consolidate in the near-term as risk appetite may increase as the bailout plan eventually concluded. In the long-term, we stay bullish in gold given our views that deficit problems in the Eurozone and other advanced economies are far from being resolved. Loss of confidence in fiat currency will lead to inflows of gold investments.
A drag on the market was China's heightened tightening measures. The People's Bank of China announced to increase the required reserve ratio of commercial banks by 50 bps, effective May 10. The decision is expected to remove RMB 300B from the financial system. However, the move may delay a rate hike and appreciation of RMB.
We have a busy week ahead. Apart from various manufacturing indicators, the RBA and the ECB will have meetings on Tuesday and Thursday respectively. Friday comes US non-payment payrolls. The UK general election will be held Thursday with results probably coming on Friday evening.
Commitments of Traders:
Crude: Net speculative long positions slid to 109.3K contract last week, in tandem with price decline. Uncertainty in Greece and surprising inventory builds were main reasons for the outflow. We expect a pickup in net longs in the coming week as concerns about Greece are eased in the near-term while stock builds at Cushing slowed down
Natural Gas: Net speculative short positions dropped to 183.9K contracts. Increase in gas storage during the week was less than expected while gas rig counts dropped for the first time since December 25. However, net shorts should resume the uptrend in coming weeks as the positives last week proved to be short-lived
Gold: Net speculative long positions rose to 225.7K contracts, the highest level since mid-January, as sovereign crisis in Europe increased appeal of the yellow metal
Silver: Net speculative long positions rose to 40.6K contracts as investment demand for gold spurred interests in silver
Platinum: Net speculative long positions edged high to 23.7K contracts