The Eurozone once again grabbed the most market attention last week. Sentiment waxed and waned as investors were torn between fears of a Greek default and the dry-up of European banking system, and finance leaders' commitments to resolve the problems. Earlier in the week, credit risk in the European banking system has surged to all time high as the market priced in more than 90% chance that Greek debts will default. Risk aversion was intensified by Moody's downgrade of French banks Societe General and Credit Agricole, as well as ECB's announcement that 2 more banks has borrowed money from the 7-day USD funding operation. Market sentiment dramatically reversed after the ECB said than it would, in coordination with the ECB, the BOE, the BOJ and the SNB, conduct 3-month USD liquidity operations for 3 times through the year, aiming to provide adequate liquidity to the banking system. Speculations of Chinese buying of peripheral bonds and EC President Jose Barroso's comments that the commission will 'soon present options for the introduction of euro bonds' and 'some of these options could be implemented within the terms of the current treaty' only added to investors' optimism. During NY session or late European session on Friday, sentiment, however, soured again as the informal ECOFIN meeting in Poland turned out to be a non-event. Financial ministers signaled no further actions to boost the economy or to rescue debt-ridden European countries. Precious metals got hammered as market sentiment improved generally. Gold traded choppily throughout the week. Price broke below 1800 on several occasions but managed to end the week at 1814.7, down -2.39%. Silver followed gold's coattail and got dumped. The benchmark Comex contract lost -1.91% on weekly basis. PGMs also weakened with platinum and palladium slipping -1.31% and -0.76% respectively. The tug of war between potential supply disruption due to wage negotiations in South Africa and concerns over the demand outlook indicates prices will remain confined within recent 5-15% range.

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Macroeconomic data took a backseat. Indeed, a chunk of indicators pointed further deterioration in US economic outlook. Yet, rising price pressures should put the Fed in a dilemma on whether to add further easing. The Empire State Manufacturing Index contracted to -8.8 in September, accelerating from -7.7 in August with new orders, shipment and inventories components weakening. While the headline Philly Fed Manufacturing Index improved to -17.5 in September from -30.7 in August, the components remained dismal. The new orders component has been staying in negative territory in 3 out of the past 4 months while shipments plunged to a 2-year low of -22.8 during the month. Both surveys indicated that contraction in the manufacturing sector will continue, if not deteriorate further, in coming months. Concerning the job market, employment indicators in both survey pointed to continuing weakness. Meanwhile, initial jobless claims unexpectedly rose +11K to 428K in the week ended September 10, taking the 4-week moving average +4K higher to 419, the highest level since July 16. We believe the recent uptrend in initial jobless claims is worrisome and worth a close watch in coming weeks. Headline CPI in the US climbed +0.4% m/m in August from +0.5% in the prior month. On yearly basis, the reading rose to +3.8%, accelerating from +3.6% in July. Core inflation stayed at +0.2% on monthly basis in August but soared to +2% from a year ago after growing +1.8% in July. Heightening inflationary pressures in the US should support hawks' view in dissenting further easing.

The major event next week is the 2-day FOMC meeting on September 20-21. According to Fed Chairman Ben Bernanke stated at Jackson Hold Symposium, it was originally a 1-day meeting but was rescheduled to 2 days for discussing 'the possible costs and benefits of various potential tools' to stimulate the economy. After pledging to keep the federal funds rate at exceptionally low levels for at least through mid-2013, the remaining options the Fed can take include: lowering interest rates paid on excess reserve, shifting the composition of the balance sheet to longer maturity, formalizing an inflation target, indicating explicit interest rate ceilings for longer-term Treasury debts (with an ingredient of asset buying) and outright bond purchases (i.e. QE3). Notwithstanding oppositions from several hawks, the Fed will likely announce something called 'operation twist' -increasing the average maturity of securities holdings by swapping holdings of lower maturities Treasuries with longer ones. While it's questionable on how much the economy can benefit from such a means, the Fed is not likely to pursue an outright bond purchases given rising inflationary pressures.

The IEA said last week that it terminated the joint release of strategic oil reserve announced on June 23. The agency stated that its 28 member countries 'concluded that the interrupted Libyan supplies have been successfully addressed by a combination of the IEA collective action and increased production from producer countries' and the action can be ended as expectations for global oil demand growth has weakened. According to the IEA, of the 60 mmb SPR, some 38 mmb were released from public stocks and 22 mmb via a relaxation of obligatory industry stockholding. Public stocks were taken up by the market over the course of July and August. Uptake of public stocks has been 97%, compared with 73% at the time of the 2005 collective action.

In its monthly energy report, IEA revised lower its global oil demand forecasts. The IEA projected oil demand will rise +1.36% to 89.3M bpd this year and then +1.57% to 90.7M bpd in 2012, compared with previous forecasts of 89.5M bpd and +91.1M bpd respectively. The revisions were anticipated in the midst of the economic turmoil. Moreover, IEA's forecasts have been the more optimistic among the 3 major agencies. Note that, the downgrades came just 4 months after the agency had revised up its global demand outlook in June. The change indicated something critical has happened in global economic developments in these 2 months.

For the week ended September 9, US natural gas storage increased +87 bcf to 3112 bcf. Stocks were -140 bcf less than the same period last year and -52 bcf, -1.6%, below the 5-year average of 3164bcf. Separately, Baker Hughes reported that the number of gas rigs jumped +20 units to 912, the highest level since January 28, 2011, in the week ended September 16. Oil rigs increased +5 units to 1062 and miscellaneous rigs stayed climbed + 2 units to 11, sending the total number of rigs to 1985 units, up +27 units from the previous week and the highest since November 2008. Directionally oriented combined oil, gas, and miscellaneous rigs added +6 units to 241 while horizontal rigs were up +3 units to 1137 and vertical surged +18 units to 607.

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