Macroeconomic events were the focus of last week and strength in USD put commodity prices under pressure for the second week. The USD index gained +1.5% last week as concerns about sovereign default triggered selloff in risky assets and demand for safe USD and JPY. Reuters/Jefferies CRB Commodity Index slid -3.6%.

Although the Greek government outlined a 3-year plan to cut its deficit, currently at over 12% of the country's GDP, to below 3% of GDP as required by EU, the market doubted its effectiveness. Greece's 5-year and 10-year government bond yields rose +12.4% and+14.95, respectively. At the same time, the 5-year and 10-year credit-default swap surged to 3.73% and 3.4% respectively last week. These suggested investors are increasingly concerned about the ability of the country to contain its debts without helps of EU and other countries.

At the World Economic Forum in Davos, the People's Bank of China reiterated its goal as to curb inflation and to maintain stable RMB. Although the government said it will 'continue with current accommodative fiscal and monetary policy', the market still expect it will step up the tightening policy. If China is to limit lending and unwind the stimulus measures, it's definitely harmful for global economic recovery. China's economy expanded +10.7% qoq in 4Q09. The IMF forecasts the country will continue to lead world growth this year.

In the January World Economic Outlook, the world lender raised its forecasts on global GDP growth to +3.9% in 2010, compared with previous estimates of +3.1%, se driven by robust growth in emerging and developing economies. China will continue to be the locomotive with annual growth rates of +10% this year.

US GDP expanded +5.7% qoq in 4Q09, the strongest pace in 6 years, with inventories contributing +3.4% to growth. Although the stronger-than-expected reading lifted commodity prices, gains were soon erased due to lack of follow-through and strength in USD.

Other events happened last week include FOMC and RBNZ's announcements to keep their policy rates unchanged, Obama's first State of Union address in which he stated job creation will be the number 1 priority in 2010 and Bernanke's confirmation for a second term as the Fed Chairman.

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Crude Oil

Despite brief rebound to 74.82 after release of strong USD GDP, crude oil price dived to 1-monht low at 72.43 amid rally in USD. The benchmark contract ended the week at 72.89, losing -2.2% on weekly basis and recorded the third consecutive weekly decline after surging to 83.95, the highest level in 15 months, in the beginning of January.

Fundamentals in the US energy market remain weak. The US Energy Department reported crude oil inventory dropped -3.89 mmb to 326.7 mmb in the week ended January 22. Cushing stocks also drew-0.69 mmb, the 5th consecutive weekly decline. We believe the main reason for the huge decline in crude stocks was the closure of the Houston Ship Channel, which serves the largest US petroleum port, shut for 2 days because of fog. It was reopened on January 21. Also, the oil-tanker spill in the Sabine Neches Waterway has led refiners to cut back production. We expect to see another draw next week as the oil spill is still impacting imports.

Both gasoline and distillate rose +1.99 mmb to 229.4 mmb and +0.36 mmb to 157.5 mmb respectively. Demand for gasoline edged slightly high on weekly basis but the level at 8.619M bpd remained below last year's level. Beware that last year's demand was very weak as it was in the midst of the worst of economic crisis. Distillate inventory built modestly compared with market exception or a draw. Imports surged +142%, on weekly basis, to 0.658M bpd, the highest level never seen since 2006. Demand dropped -2.6% to 3.725M bpd during the week. The level was still -12.5% below last year's level.

In coming few years, oil demand will be heavily relying on growth in Asian market. According to the International Energy Agency (IEA), preliminary data indicated that China's total oil demand soared +16.4% yoy in November, driven by both government spending and supply disruption due to cold weather. Demand is anticipated to have increase +7.2% to 8.5M bpd in 2009, followed by a +4.3% rise to 8.8M bpd in 2010. China takes up almost 10% of world oil demand and that's why market sentiment has deteriorated dramatically after China guided yields higher, increased required reserve ratio and limited bank lending. The market worried that the growth engine will lose momentum this year.

Other than China, India is another hot spot. Total oil demand probably rose +5.4% in 2009, followed by another +3% this year. Robust oil consumption in India was driven by gasoline demand which, in turn, was due to strong car sales.

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Natural Gas

Settling at 5.131, natural gas tumbled -11.8% last week. Macroeconomic uncertainty, anticipation of warmer weather and a return to surplus were hurting gas price. According to the US Energy Department, gas storage dropped -86 bcf to 2521 bcf in the week ended January 22. At current level gas inventory was +120 bcf higher than the same period year and +87 bcf (+3.6%) higher than 5-year average. The benchmark contract for natural gas slid for 4 consecutive days from Monday to Thursday, losing almost -12%.

Rally in gas price over the past few weeks attracted more supply. Baker Hughes reported that the number of gas rigs rose to 861 units in the week ended January 29. This was the highest level since March 2009. The US Energy Department believes that supply disruption, driven by the huge plunge in rig counts during from mid-2008 to mid- 2009 will be reflected later this year.

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Precious Metals

Although gold price seemed to have found temporary support around 1075, the benchmark contract slid -0.5% last week following a -3.6% decline in the prior week. Strength in USD and shift of demand to PGMs weighed on the yellow metal. In the near-term, gold should remain under pressure as the dollar will probably be boosted higher by sovereign risk problems in Greece. In fact, investors are very much concern about the Greek fiscal problem will be spread to other European nations. Greek bonds and CDS showed that investors are increasing worried that the EU will not assist the nation to come out of debts. The euro plummeted to as low as 1.3861, the lowest level since July 2009.While we believe the EU and IMF will eventually offer some kinds of financial supports to save Greece from going bankrupt, the problem will remain a drag for the euro, and hence gold.

Silver, a metal that is more leveraged to global economic recovery, was sold heavily over the past 2 weeks. Closing at 16.19, the benchmark contract for silver lost -4.3% last week, In fact, silver has been in a downtrend and has corrected -12.3% over the past 3 weeks.

Platinum also declined in tandem with other commodities. However, recovery over the past 2 days signaled near-term support was seen at 1483.1. Palladium showed similar pattern. Although the benchmark contract retreated -6.2% last week, buying interest emerged around 400/410. We anticipate stronger rebound next week.

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