It was rather an eventful week despite the absence of major central bank meeting. Germany's Chancellor Angela Merkel started her 3-day trip in China, meeting leaders of the world's second largest economy for discussions on resolution of the Eurozone sovereign debt crisis, Iranian and Syrian issues, and rare earth restriction. Chinese Premier Wen Jiabao stressed that solving the European debt crisis is 'urgent' and China is 'considering more participation' in the European Financial Stability Facility (EFSF) and the European Stabilization Mechanism (ESM). Concerning tensions over Iran, Germany urged China to use its influence to persuade Iran to give up its nuclear program. China has been refusing Iran sanction despite its opposition against Iran's nuclear development. While China has put forward the reason of non-interference in 'internal affairs' of other countries, some believed that the oil-thirsty economy does not want to hurt the relationship with its third largest foreign energy source. In our previous article, we mentioned that China may take advantage of the EU embargo to increase its Iranian oil purchases at a bargain.

Manufacturing data released during the week buoyed market sentiment. China, the world's second largest economy, reported that manufacturing PMI climbed to 50.5 in January from 50.3 a month ago. It also beat consensus of a dip to 49.5. This indicated that China's manufacturing activities probably stabilized due to the government support fiscal and monetary measures. In the Eurozone, the final PMI was revised +1 point higher to 48.8 in January, up from 46.9 in December. Germany's manufacturing activity has rebounded by +2.6pts into expansionary territory at 51.0. In the US, ISM manufacturing index climbed only 0.2 points to 54.1 in January, compared with market expectation of +54.5.

The US employment report for January also delivered pleasant surprises. The number of non-farm payrolls increased +243K during the month, up from +150K as expected and an upwardly revised +203K in December. The jobless rate unexpectedly slipped to 8.3% from 8.5% in December. The better-than-expected triggered some Fed members to voice out their reluctance to extend bond purchases. St. Louis Fed President James Bullard (not a voting member this year), the first Fed President to support the QE2, stated that 'the economic news and economic data... has been surprising to the upside'. He believed 'significant deterioration in the economy and some threat of deflation or inflation moving significantly below our inflation target' are needed to justify more bond buying.

In the coming week, central banks that will hold meetings include the RBA, the ECB and the BOE.

In late last year, we mentioned that the spread between WTI and Brent crude narrowed as US inventories shrank and the lost crude from Libya began to recover. The widening actually began again in late December and accelerated last week. Prompt WTI crude oil price fell -1.73% while the equivalent Brent crude contract soared +2.80% this week. The divergence was driven by concern over oil shortage as the EU approved an embargo on Iran's exports and Iran retaliated by suggesting a stop in supplying oil to some European countries (buoying Brent crude prices) and the surge in oil inventory reported in the US (suppressing WTI prices). Moreover, over the past days, Brent's forward curve has again returned to backwardation from contango, suggesting the strong outlook.

Natural gas remained under pressure during the week. The DOE/EIA reported that gas inventory dropped --132 bcf to 2 966 bcf in the week ended January 27. Stocks were +586 bcf above the same period last year and +601 bcf, or 25.4%, above the 5-year average of 2 365 bcf. Separately, Baker Hughes reported that the number of gas rigs fell -32 units to 745 in the week ended February 3. Oil rigs climbed +20 bcf to 1 245 units and miscellaneous rigs added +1 unit to 7, sending the total number of rigs to 1 997 units. Directionally oriented combined oil, gas, and miscellaneous rigs stayed at 217 units while horizontal rigs decreased -11 units to 1 174 and vertical remained unchanged at 606 units during the week.