Interestingly, increases in risk appetite led to the rise in the US dollar on Tuesday. Financial markets climbed higher as driven by better-than-expected US retail sales in July and heightened speculations that the Spanish government would request for funding to lower the country's yields. Wall Street spend most of the day in the positive territory but lost momentum towards the end, leading to -0.01% dip in the S&P and +0.02% gain in the DJIA. In the commodity sector, gold slipped for the second consecutive day with the front-month Comex contract briefly breaching 1600 at one point before ending the day at 1602.4, down -0.63%. Crude oil prices gained with the front-month WTI and Brent crude contracts gaining +0.75% and +0.38% respectively.

The Eurozone data was indeed disappointing but investors were pleased that both French and German economies avoided recessions in 2Q10. Moreover, the disparity between the core and the peripheral Eurozone would be viewed as a problem by the ECB officials, giving them more pressure to act, yet reducing their worries that unconventional monetary easing would place inflationary pressure on the core. At the other side of the Atlantics, the US data was more encouraging. Retail sales gained +0.8% m/m in July after a -0.7% drop a month ago. This came in higher than market forecasts of +0.3%. Excluding auto, retail sales also added +0.8%, following a -0.8% drop in June. The US PPI also exceeded market expectation on monthly basis. The gauge added +0.3% m/m in July after climbing +0.1% a month ago. The market had anticipated a +0.2% rise. This set of data has trimmed expectations of QE3 in September. This, we believe, is a reason for the strength in the greenback and the decline in gold prices on Tuesday

Investors shrugged off concerns over gains in US crude oil inventory. According to the industry-sponsored API, crude inventory gained +2.78 mmb in the week ended August 10. Gasoline stock fell -2 mmv and distillate added +1.2 mmb. The market anticipated the DOE/EIA would report a -1.5 mmb drop in crude inventory while gasoline and distillate stock would have slid -2 mmb and -0.28 mmb respectively.

Weekly change in inventory as of 10/08/12 ChangeConsensusPrevious
Crude oil  -1.50 mmb-3.73 mmb
Gasoline  -2.00 mmb-1.80 mmb
Distillate  -0.28 mmb-0.72 mmb

Comparison between API and EIA reports:

API Aug 10)

EIA (Aug 10)

Forecast (using API's inventory level)Inventory
Crude oil+2.78 mmb367.09 mmb-5.35 mmb
-2.77 mmb367 mmb
Gasoline-2.00 mmb205.66 mmb+0.42 mmb

-0.41 mmb

206 mmb
Distillate+1.20 mmb

126.13 mmb

+2.37 mmb
+2.59 mmb126 mmb