Crude oil retreats after rising to 77.19, the highest level since May 11, on profit-taking and fresh concerns over sovereign crisis. A Spanish newspaper said that the EU, IMF and the US Treasury are putting together a credit line of 250B euro for Spain. This spurred worries about the country's liquidity and fiscal conditions.
The euro and other growth currencies also slide although the news was 'firmly' denied by the EU. Investors use this as an excuse to take profits as these assets have strengthened in recent days as driven by robustness in macroeconomic data. It's time to take a closer look at the developments in the Eurozone.
In a draft document, 'Consolidation Requirement in Spain and Portugal', the European Commission warned that debt levels in Spain and Portugal may 'snowball and 'while the newly announced measures are significant and the targets imply impressive budgetary consolidation, more measures are needed to meet those targets, in particular for 2011'. These comments indicate fiscal problems in peripheral European economies are far from being under control.
Gold price grinds higher in European session as European woes increase demand for safe-haven assets. The yellow metal may also be boosted by Russian central bank's plan to diversify its international reserves.
Alexei Ulyukayev, the first deputy chairman of Bank Rossii (central bank of Russia), said in an interview that they may add Australian dollar in the reserve after considering fluctuations in the US dollar and the euro. Late last year, Ulyukyaev said USD and EUR accounted for 47% and 41% of Russia's reserves, respectively. Bank Rossii has been accelerating its gold purchase since last year. A report showed that it bought 142.9 tons of gold in 2009, up +29% y/y. As Bank Rossii explicitly talked about plans to diversify from the dollar and the euro, it's possible for the central bank to increase its holdings in gold more aggressively.
Concerning economic data, claimant counts dropped -30.9K in May while April's figure was revised to -32K from -27.1K. This lowered the claimant count rate to 4.6% from 4.7%. Moreover, ILO's unemployment rate in the quarter through April also declined to 7.9% from 8%. While the data is encouraging, analysts are indeed concerned about public sector job losses in coming years as the new UK government pledged to cut deficits. The market is awaiting the emergency budget on June 22.
In the US, the government will report housing starts and building permits data for May. While the market has anticipated slides from April, any weaker-than-expected outcome would evidence strength in previous month was just triggered by expiry of tax credits.