Crude oil almost erased all losses made in the beginning of the week with the strong rebound driven by surprising improvement in US ISM manufacturing data. Although the US Energy Department reported crude stock-build for a second consecutive week, draws in gasoline and distillate inventories soothed market concerns. Settling at 73.91, the front-month WTI contract gained +2.77% on the first trading day of September.

What worth noting is the jump of heating oil price to a 3-week high of 2.058 before closing at 2.041, up +2.48%, as distillate stockpile dropped for the first time in 14 weeks. Distillate demand also gained more than +8% during the week. Notwithstanding the volatile nature of the data, the increase together with strong ISM manufacturing data, boosted sentiment.

US ISM manufacturing index unexpectedly rose to 56.3 (consensus: 53) in August from 55.5 in July. This caught us and the market by surprise as weakening performance in Philadelphia, Milwaukee and Chicago had made us worry about a sharper drop. Details of the index were also positive with 'production' rising to 59.9 from 57 and 'employment' jumping to 60.4, the highest level since December 1983, from 58.6.

These were partly offset by modest drop in export orders and order backlogs. The strong ISM data upstaged the poor ADP employment report which showed payrolls contracted -10K in August after gaining +42K in the prior month. The mixed picture from ISM and ADP made the August non-farm payrolls (to be released on Friday) more uncertain.

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Wall Street opened higher as driven strength in Asian and European bourses after strong Chinese PMI. Rally in US stocks accelerated after ISM data. DJIA and S&P 500 Indices surged +2.54% and +2.95% respectively at close. Rise in risk appetite, however, sent bond prices lower. Gold also pulled back despite strength in the euro. The yellow metal initially extended recent strength to as high as 1256.6 but then reversed and fell to 1248.1, down -0.18%, at close.

Apart from its appeal as safe-haven during uncertainty, gold is also attractive to official sectors (i.e. central banks) as a store of value. An IMF report showed that Russia bought 16.2 metric tons in July increasing the holdings to 726.02 metric tons. Meanwhile, the IMF sold -16.85 metric tons of gold in July after selling -17.7 metric tons in June, reducing its reserve to 2917.07 metric tons. The IMF plans to sell a total of 403.3 metric tons of gold in September 2009. After purchases by India, Mauritius and Sri Lanka totaling 212 metric tons last year, the IMF in February said it would begin selling the remainder on the open market. As of end-July, the world lender should have about 100 metric tons remaining. While IMF's sales plan is old news and we do not believe the action signals disfavor by official sectors, the disposal should do nothing good for gold prices.