Financial markets retreated in Asia Monday as driven by disappointing US GDP and Fitch's downgrades of credit ratings of several Eurozone countries including Italy and Spain. The situation in Greece remained uncertain. The EU/IMF/ECB troika was unsatisfied with Greece's progress in budget reduction and warned that further funding might be withheld should the country fail to improve efficiency. A FT report stated that Germany required Greece to give up control over its fiscal decision. Instead, a budget commissioner would be appointed to take care of the issue. The idea was criticized by the Greek government.
After delivering pleasant surprising for several weeks, the US economic data showed fatigue last Friday. GDP grew +2.8% in 4Q10. While accelerating from +1.8% in the prior quarter, it missed consensus of +3.0%. Look at the breakdown, growth was driven by rapid inventory accumulation while final sales only gained +0.8% during the quarter, compared with +3.2% in 3Q11. Moreover, government spending reduced GDP growth by almost -1% percentage point during the quarter. The impact of lowering government expense would be more significant this year as the government is required to work hard of fiscal consolidation.
In the Eurozone, Fitch lowered the sovereign credit ratings of Italy, Spain, Belgium, Slovenia and Cyprus. Italy's credit rating was reduced by 2 notches to A- from A+ while that of Spain was lowered to A from AA-. Ireland's rating of BBB-plus was affirmed. According to the rating agency, the rating actions balance the marked deterioration in the economic outlook with both the substantive policy initiatives at the national level to address macro-financial and fiscal imbalances, and the initial success of the ECB's three-year Long-Term Refinancing Operation in easing near-term sovereign and bank funding pressures'.
There were news headlines stating that an agreement between Greece and its private sector bondholders (PSI) was close to resolution. It's reported that bondholders agreed to a deal that includes a coupon considerably lower than 4%. It's expected that an agreement will be finalized by this week. Meanwhile, the ECB reiterated that it won't be participating in Greek bond haircuts as PSI stands for private sector involvement, ECB is not private'. On the other hand, the Financial Times reported that Germany suggested that a budget commissioner should be appointed to manage key budget decisions in Greece. The appointee will be responsible for all major blocks of expenditure' and would have the power to veto decisions not in line with the budgetary targets set by the Troika'. The reported indicated that the proposal might be set as a condition for a further 130B bailout for Greece.
Commitments of Traders:
With the exception of heating oil, speculators were bullish towards the energy complex in the week ended January 24. Net length for crude oil futures increased +6 619 contracts to 177 845. Net length for heating oil slipped -928 contracts to 18 874 while that for gasoline rose +5 873 contracts to 77 683. Net short for natural gas futures dipped 13 577 contracts to 141 196.
Speculators were bullish on precious metals. Net length for gold futures added +6 194 contracts to 142 223 while that for silver soared +2 724 contracts to 16 117. For PGMs, net length for platinum gained +1 023 contracts to 22 084 while that for palladium gained +2 482 contracts to 7 671.