Commodities weaken further in European session but gold is relatively firm around 1100 level. Crude oil price slides -1.1% to 79.2 despite strong China demand. Rally in USD amid Greek sovereign risks also reduces demand for risky assets.

The Chinese government reported the country's implied oil demand surged to 8.65M bpd, up +19.4% y/y and +9.4% m/m, in February. Gasoline and diesel exports dropped -28% y/y and -11.8% y/y respectively. These drops have brought China back to a net importer after being a net exporter in December and January. China reduced exports as producers anticipated domestic demand to speed up in the second quarter. Although these figures were distorted as Lunar New Year fell in February, we believe the strength will be carried to March. As spring comes in late-March/April, agricultural activities will resume and increase diesel demand.

Energy prices shrug off despite the news as uncertainty on how Greece finances it debt lingers. While WTI crude oil slips below 80, both heating oil and gasoline drop further, by -1.4% from Friday's close.

Gold also edges lower but is supported above 1100. Apart from strength in USD, the unscheduled rate hike in India also weighs on the yellow metal.

Last Friday, the Reserve Bank of India increased, for the first time since July 2008, its repurchase rate and the reverse purchase rate by 25 bps to 5% and 3.5% per cent respectively. Impacts of the rate hike are moderation in economy growth, hence slowdown in gold consumption. After all, India is the world's largest gold consumer.

According to the World Gold Council, India's jewellery and net retail investment demand dropped -33% to 480 metric tons in 2009 from the same period last year. Demand was the weakest in the first quarter as economy was adversely affected by global recession and rally in gold price during that time. With helps of the government's stimulus measures, economy recovered and demand, especially for jewellery, improved gradually. In 4Q09, demand rose +17% and +13% respectively on quarterly and annual basis as the Reserve Bank of India purchased 200 metric tons of gold from the IMF. Also, the wedding season also boosted consumption.

As demand recovery from mid-2009 was driven by economic growth, we are worried that slowdown in growth as the central bank begins tightening will dampen demand this year.