The market was unexpectedly volatile despite Thanksgiving holiday in the US. Dubai authorities' call for a restructuring of debt issued by state-owned companies triggered worries about sovereign risk. Investors exited their longs on risk assets Friday before stabilizing later in the day.

Dubai World, the state-owned investment conglomerate $59 billion of liabilities, said last Wednesday that it wanted to defer repayment of its debts and those of its real estate arm, Nakheel PJSC (the subsidiary has a $3.5 billion bond coming due next month), until at least May. Dubai World said it wanted to restructure its debt, including at its property subsidiary Nakheel. According to Dubai officials, the restructuring will focus on property and foreign investments which have been worst hit by the economic crisis.

Investors panicked and quickly dumped their risky assets and turned to the USD for shelter. The dollar index rose after plunging to 15-month low at 74.17 Thursday. Reuters/Jefferies CRB Index lost -1.9% Friday and slid -0.5% over the week.


Precious Metals

Same as others in the commodity sector, precious metals slumped in Asian session Friday due to Dubai's issue before broad-based rebounds afterwards. Over the week, Comex gold gained +2.4% to settle at 1174.2 while platinum climbed +0.4%. However, silver slid -0.7% to 18.3 and palladium lost -0.5% to 362.7. Outperformance in gold price was mainly led by robust central bank demand. Emerging countries are eager to diversify their currency reserves from USD.

Sri Lanka purchased 10 metric tons of the IMF's planned gold sales. According to the central bank's announcement released last Thursday, it has been acquiring Gold from the international market over the past several months 'as a part of the diversification of the external assets portfolio'. The central bank believes the long-term stability of Sri Lanka's external reserves will be strengthened as gold holdings will provide 'a stable and long-term cushion against the impact of any potential volatility in major international currencies and financial instruments, in international financial markets'.

Sri Lanka was the third central bank in the world, as well as in Asia, to buy gold from the IMF this month. Earlier, the Reserve Bank of India and central bank of Mauritius purchased 200 metric tons and 2 metric tons, respectively, from the world lender.

Sale to Sri Lanka was announced shortly after Financial Chronicle's report that India may want to buy the remaining of the IMF's planned gold sales. This reinforced the notion that central bankers are seeking to diversify their reserves and gold is believed to be a good choice.

Apart from Asian economies, emerging markets such as Russia is also accumulating gold. Earlier this week, Bank Rossii, Russia's central bank, reported that it increased its gold holdings by +2.6% to 19.5 metric tons in October so as to raise precious metals' percentage in reserves.

According to Chairman Sergei Ignatiev, 'the central bank has in the course of several years replenished its supply of gold with the goal of diversifying our gold and foreign currency reserves'.

Bank Rossii First Deputy Chairman Alexei Ulyukayev said on November 18 that the central bank is ready to buy all gold (30 metric tons) that Gokhran, the precious metals stockpile in Russia, has planned to sell this year.

The events in Dubai have once again brought attentions to sovereign risk and this should drive investors to safe-haven assets. The sharp rebound in USD and selloffs of risky assets such as equities, emerging market assets, commodities and high-yield currencies were an indication of risk aversion. While investors may worry that strength in the USD will pressure gold, the yellow metal did outperform during times of sovereign crisis, even though the dollar strengthened,

EURUSD peaked in mid-July, 2008, as investors found out that the US was not the only economy that was facing financial crisis. In fact, the disaster was contagious and economies worldwide also suffered. USD began to rise against the euro. At that time, inflationary pressure was subdued due to recessionary fear and slumps in commodity prices. Interestingly, gold price surged against the backdrop. We believe the temporary breakdown of the gold's inverse correlation with the USD was mainly due to fear that the global financial system might fall.

While we believe the contagious effect of Dubai's bankruptcy to other emerging economies is not big, market sentiment is always the most important driving forces for asset prices. Therefore, should investors' concerns on the issue aggravate and risk appetite tumbles, there's chance for gold and USD to rally at the same time.


Base Metals

LME copper rallied 14-month high at 7055 Thursday before plunging to 6855 Friday. Over the week, the benchmark contract gained +0.15%. This made copper the best performer in the complex as all others slipped due to Dubai's issue. Nickel, dropping -3.1%, was the worst performer during the week. LME stocks continued to rise for all major base metals.

Despite Chinese government's pledge of maintaining the stimulus policies, we worry that rally in copper price in the near-term have been overextended.

Preliminary data showed by ICSG suggested fundamentals of copper remained weak. At November's Copper Bulletin, the organization stated that 'a decline in Chinese apparent usage based on lower net imports of refined copper and a decrease in EU apparent usage over the traditional holiday period led to an apparent refined copper market surplus in August of around 150 000 metric tons (t). When making seasonal adjustments for world refined production and usage, August showed a surplus of about 90,000 t. The apparent refined copper balance for the first 8 months of 2009, including revisions to data previously presented, indicates a production deficit of 32,000 t (a seasonally adjusted surplus of 160,000 t). This compares with a production deficit of 117,000 t (a seasonally adjusted surplus of 72,000 t) for the same period in 2008'.

'In the first 8 months of 2009, world usage is estimated to have decreased by 1.5% compared with that in the same period of 2008. A strong increase in Chinese apparent usage (+45%) was insufficient to offset a decrease of 19% [1.7 million metric tons (Mt)] in the rest of the world. Chinese apparent usage increased by 1.5 Mt in the first 8 months of 2009, compared with usage in the same period of 2008. Copper usage in the other important markets, the EU-15 countries, Japan, and the United States, decreased by 23%, 34%, and 23%, respectively. These three regions currently represent about 29% of total world copper usage'.

Crude Oil

WTI crude oil price plummeted to as low as 72.39 after Dubai's attempt to delay its debt repayments. Investors turned cautious as the news raised concerns on global economic recovery and hence improvement in energy demands. However, the black gold, as well as other risky assets, rebounded strongly and closed almost flat from Thursday. Over the week, the benchmark contract for crude oil slid -1.8% to settle at 76.05.

Although crude oil continued to move within the recently established range of 75-80, its trading momentum has clearly shown fatigue. Moreover, price movement has derailed from weakness in USD. We believe this has been driven by the sluggish fundamental outlook on the energy market.

Released by the US Energy Department, crude oil inventory rose +1.02 mmb to 337.8 mmb in the week ended November 20 as driven by builds at the Gulf Coast. Imports bounced back as operations resumed after Hurricane Ida. Builds in the Midwest was mainly driven by Cushing inventory while surged +1.2 mmb to 29.5 mmb.

Gasoline inventory surged +1 mmb compared to consensus of a gain of +0.3mmb, to 210.1 mmb. Consumption climbed +1.9% from last week to 9.015M bpd. However, the 4-week average of 8.933M bpd was -1% below the level in the same period last year. This indicated that Thanksgiving holidays failed to boost consumption.

Distillate stockpile drew by a modest -0.53 mmb to 166.9, while analysts had anticipated a flat reading. Demand soared +1.7% to 3.602M bpd on weekly basis. However, both this reading and the 4-week average were well-below last year's level, signaling stagnant demand outlook. Temperatures in the Northeast are forecast to decline in coming weeks. Therefore, inventory may record further amid rise in consumption.

WTI crude oil has traded at discounts to Brent crude again recently. Apart from stock builds at Cushing, Oklahoma, abandonment of WTI as the benchmark of oil pricing in the Middle East also weighed on price. There's possibility for Kuwait, after Saudi Arabia, to switching the pricing of its crude sold to the US to the Argus Sour Crude Index from WTI. News reported a senior Kuwait oil official said that 'Kuwait could look at it definitely because we don't think the pricing peg today to the WTI is really representative of the market'.

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Natural Gas

Gas price rallied for 3 consecutive days after the US Energy Department reported build of only +2 bcf of storage to 3835 bcf in the week ended November 20. Although this pushed gas inventory higher, the build was smaller than the same period in 2008 and 5-year average. This also triggered speculations that recovery in US industrial demand helps pushing demand higher.

According to Baker Hughes, the number of gas rigs increased 22 units, or +3%, to 748 units in the week ended November 27. The increase was the biggest in 4 years.

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