Investors Turn Cautious as Uncertainties Remain in the Eurozone

By Roger Baettig | September 18 2012 4:02 AM

Crude oil prices slumped on Monday on profit-taking. The surprising decline of almost US$5 in just a few minutes on very high volume triggered the CFTC to investigate the case with the CME. The front-month contract for WTI crude oil slipped to as low as 94.65 before ending the day at 96.62, down -2.40%, while the equivalent Brent crude contract plunged to a 6-week low of 111.5 before settling at 113.79, down -2.66%. Gold also faced profit-taking and USD's recovery, sending the Comex benchmark contract -0.12% lower. Market sentiment turned cautious, following the excitement last week due to QE3, as the New York Fed manufacturing index fell to the lowest level in more than 3 years. Territorial disputes between China and Japan over Diaoyu islands and the resulting anti-Japanese protests have caused a number of Japanese firms to temporarily shut their Chinese operations. Asian shares declined due to rising geopolitical tensions in the region.

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In the Eurozone, investors were disappointed by the lack of agreement reached by EU leaders regarding a unified banking supervisory framework. The progress has been slow and an ECB Governing Council member Nowotny stated that "quality must come before speed". While policymakers have been endeavoring to keep the member countries in the bloc, a poll showed two-third of all Germans think their country would be better without the euro. Yet, Luc Coene, an ECB Governing Council member, denied any ideas that Germany would leave the Eurozone. He said that Germans "know perfectly well that the euro has been a blessing for them, because it has kept the currency somewhat undervalued". Meanwhile, Germany's Chancellor Angela Merkel showed more enthusiasm in closer political coordination with the bloc. She also suggested that Germany's share in the ECB bond-buying plan might not be capped at 190B euro.

The RBA released the minutes for the September meeting. While the central bank left the cash rate unchanged at 3.5%, the minutes showed that policymakers are willing to lower interest rates if the economic condition deteriorates further. According to the minutes, "the current assessment of the inflation outlook continued to provide scope to adjust policy in response to any significant deterioration in the outlook for growth". Meanwhile, strength in AUD has also affected economic growth. As indicated in the minutes, "members discussed the possibility that the high level of the exchange rate was weighing more heavily on the economy than might be expected".

On the US data, the Empire State manufacturing index dropped to -10.4 in September from -5.85 a month ago. The market had anticipated an improvement to -2. Today, the US' NAHM housing market index probably added +1 point to 38 in September. Germany's ZEW economic sentiment might have climbed to -20 in September from 25.5 a month ago. Current situation and economic sentiment indices probably also improved from a month ago.