Commodities were mixed yesterday despite market optimism about non-standard measures to be adopted by the ECB. Weakness in confidence in the Eurozone and economic contraction in Spain weighed sentiment. The front-month contract for WTI crude oil slid -0.39% to settle at 89.78 while the equivalent Brent crude contract dropped -0.25% to 106.20 at close. Worries over the economic outlook and future oil demand have upstaged news that OPEC's oil supply has declined due to Iran. Gold remained firmed, hovering around the highest levels in a month.
While speculations of ECB's intervention remained in focus, the market was distracted by the disappointing economic data released in the region. The Eurozone consumer confidence was finalized at -21.5 in July, compared with the preliminary value of -21.6, while economic confidence dropped -2 points to 87.9. Industrial and services confidence also declined from June, by -2.2 points and -1.1 points respectively. The set of data suggested that consumer confidence stayed its lowest level since September 2009. Meanwhile, the latest figure showed that recession deepened in Spain with GDP contracted an annualized -0.4% in 2Q12. The euro slipped despite European officials' pledge to defend the single currency and the Eurozone, In fact, most investors realized that President Draghi's measures would inevitably result in the debasement of the euro.
Commodity prices were affected by the situation in the 17-nation region. Concerns over the economic outlook took centre stage yesterday and overshadowed news that OPEC output dropped in July. Sanctions over Iran by the Western allies have pushed Iran's oil production, originally ranked second, to be less than Iraq. The embargo is a key reason leading to the fall of OPEC output by -450K bpd to 31.2M bpd during the month.
On the other hand, gold remained firm amid the loss of confidence on fiat currencies as both the Fed and the ECB are leaning more towards quantitative easing. At the testimony before the Congress, Fed Chairman Ben Bernanke last week admitted the US as well as the world economy is facing increasing uncertainty. He stated that 'economic activity appears to have decelerated somewhat during the first half of this year' but pledged that the Fed is 'prepared to take further action as appropriate to promote a stronger economic recovery'. This has raised hopes that QE3 will be announced in August of September. For the ECB, President Mario Draghi said on July 26 that policymakers are ready "to do whatever it takes to preserve the euro" and he affirmed that the measures would be "enough". His comments have driven speculations that the central bank would intervene the bond markets directly. Yet, any of these measures would involve expanding the balance sheets and currency depreciation. Once again, unconventional measures are driving investors to hard assets and gold is the traditional safe-haven.