Fed's downgraded outlook on recovery and China's soft July data reignited concerns about global economic slowdown. Asian stocks fell with the MSCI Asia Pacific index falling, by -1.5%, to a 2-week low. Treasuries and German bunds climbed, signaling the market has turned more risk-averse. On the commodity market, WTI crude oil continues to trade below 80 while copper recovered modestly after recording the biggest loss in almost a month yesterday. Gold hovers around 1200.

The Fed reversed the plan to exit easing policies as economic data released since June's meeting signaled 'the pace of recovery in output and employment has slowed in recent month'. Policymakers now believe 'the pace of economic recovery is likely to be more modest in the near term than had been anticipated'. Although the decision to 'keep constant the Fed's holdings of securities at their current level' by 'reinvesting principal payments from agency debt and agency mortgage-backed securities in longer-term Treasury securities' indicates the central bank's commitment to boost the economy, the move has been priced in over the past 2 weeks. Moreover, reinvestment of agency and agency MBS proceeds is a small step and is not expected to have significant impact of economic growth, though it may imply more measures to come in the future.

Chinese growth moderated further in July, as shown in the new set of government data. Industrial production expanded +13.4% y/y in July, compared with +13.7% growth a month ago. This is the 5th monthly slowdown for IP and the further weakness is expected in coming months given soft readings in PMI. Money growth and lending also slowed while fixed asset investment eased to +22.3% y/y in July from +24.9% in June. Disappointment from these areas upstaged headline CPI reading which soared +3.3% y/y in July from +2.9% y/y in June.

Together with preliminary trade data for July, we expected base metals will be exposed to slowdown in Chinese economic growth. Recent rally in base metal prices may halt soon.

Gold changes little in European session. Price action in late-2008 to 1Q09 suggested QE is positive for the yellow metal. During the period, gold price rallied and approached 1000 in February 2009 after tumbling to 710 in November 2008 as the Fed announced the QE measures. While, in theory, gold should rally again as Fed's reinvestment plan indicates the resumption of QE, the situation this time may be more complicated. In late-2008 to 2009, global central bankers concurrently adopted easing policies to combat the worst recession and major central banks aggressively took interest rates to unprecedentedly low levels.

As world economy began recovery later in 2009, monetary policies diverged. Rate hikes have been seen in countries with more rapid growth while others continued to keep rates low. Countries with slow growth also opted for different policies. While the Fed is introducing more accommodative measures, the BOJ refrained from QE. In Europe, the ECB see rising likelihood of withdrawing excess liquidity as there have been signs of growth while the BOE may increase rates before exiting the asset purchase program. Opposing policy response of economic development will complicate gold price outlook and increase volatility of price movement.