While the financial markets continued to be haunted by the rapidly deteriorating sovereign debt conditions in the Eurozone, what added to investors' concerns were disappointing economic indicators from the US. The weaker-than-expected payroll addition in May renewed speculations that the Fed would have to implement QE3, probably after expiration of operation twist in June. This was the main reason driving gold's rebound back above 1600 in NY session Friday. Note that the precious metal complex outperformed others in the commodity sector we covered while the energy complex was the worst performer.
The US employment report showed that non-farm payrolls increased only 69K in May (consensus: 150K) and the April reading was revised significantly lower to 77K from 115K reported last month. The jobless rate climbed higher to 8.2% from 8.1% in the prior month. While the April data was attributed to the winter weather, the May one could blame nothing but the loss of growth momentum. Job creation was weak across the board with contraction seen in various industries such as construction, business services, hospitality, information and government. Weakness in the job market has raised the possibility of further easing by the Fed. Boston Fed President Eric Rosengren indicated the report has signaled that the Fed may need to implement more stimuli. Indeed, Chairman Ben S. Bernanke stated in the April meeting that more accommodation would be required of unemployment fail to make sufficient progress towards its longer-run normal level.
In the Eurozone, as investors awaited the Greek election in June, health of the Spanish banking system also led them to dump risk assets. The latest news suggested that the Spanish government has negotiated with the ECB in purchases of the debt-ridden country's bonds as massive net capital outflow was recorded last month. The Economy Minister Luis de Guindos warned that the country is in a very, very, very difficult situation.
The ECB meeting next Wednesday will likely see the President give more guidance on the outlook of the crisis. Also, the RBA and the BOC will hold policy meetings on Tuesday and the BOE will also have meeting on Thursday.
Energy: Crude oil prices slumped with the front-month WTI crude plunging 8.4% while the equivalent Brent crude contract losing -7.9% during the week. The latter settled below 100 for the first time since October 2011. Given the highly uncertain Eurozone outlook and the one step forward, two steps backward economic developments in the US, we expect downside risks to remain.
With regards to some questions about the seasonal impact in May, we do not think the monthly declines in May over the recent 3 years were due to seasonal factors. Rather, we believe they were driven by the ongoing sovereign debt crisis in the Eurozone. Indeed, the charts below showed that, over the 10 years from 2002, WTI crude gained 5 times in May while Brent crude rose 4 times. These signaled no indications of fundamental seasonal factors affecting crude's falls.
Natural Gas declined for a second straight week after the 4-week rebound from mid-April to mid-May. The DOE/EIA reported that gas inventory increased +71 bcf to 2 815 bcf in the week ended May 25. Stocks were +732 bcf above the same period last year and +724 bcf, or +34.6%, above the 5-year average of 2 091 bcf.
Separately, Baker Hughes reported that the number of gas rigs dropped -6 units to 588 in the week ended June 1. Oil rigs increased +3 units to 1 386 and miscellaneous rigs stayed at 6 units and the total number of rigs was down -3 units to 1 980 units. Directionally oriented combined oil, gas, and miscellaneous rigs slid -5 units to 217 while horizontal rigs decreased -8 units to 1 183 and vertical rigs gained +10 units to 580 during the week.
Precious Metals: Gold rebounded sharply in the US session on Friday as the disappointing US payroll report ignited hopes of further Fed easing. The benchmark Comex contract added +3.3% during the week, outperforming both silver and platinum but underperformed palladium which soared +4.1%.
Many people have said that the gold's decline and breach of 1600 was manifestation of the loss in its safe-haven appeal. However, we saw the yellow metal's trading was rather range-bounded, when compared with other commodities. While gold's decline has been driven by the slump in the single currency, the former has dropped less than -1.0% since the sovereign debt crisis in the Eurozone deteriorated after French and Greek elections in early May, while the latter has accumulated over -5.0% loss. The safe-haven appeal of gold remained although it might be less prominent than the past few years. We expect more funds will be flowed to the yellow metal in coming weeks as speculations of Fed's QE3 heightened.