Financial markets had another volatile week as economic data in the US and renewed sovereign debt concerns in the Eurozone continued to shake confidence. Earlier in the week, risk appetite was boosted by better-than-expected US retail sales and Japan's GDP data. M&A news (Google's purchase of Motorola Mobility) sent stock prices higher and in turns boosted risky assets. Sentiment turned sour again in the middle of the week and deteriorated further on Thursday with stocks, commodities (except for gold) and higher-yield currencies facing another big selloff amid disappointing US data. While weaker-than-expected initial jobless claims, housing data and manufacturing index gave further signals that the country may have a double-dip recession, rising inflation pressures indicated it's getting more difficult for the Fed to implement measures to stimulate growth.

The Franco-German meeting failed to come up with solutions to settle the debt crisis. Leaders of biggest economies in the 17-nation region proposed to create a 'true European economic government' which will eventually lead to a common tax and fiscal policies within the Eurozone. Concerning fiscal issues, Germany and France will create a common corporate tax base and tax rate between the 2 countries from the start of 2013. Moreover, they will propose in September the imposition of a new financial transaction tax across all Eurozone members. While the details of the types of taxes were not provided, investors were obviously irritated by the financial transactions tax as the euro and equities plunged after the announcement.

The ECB said that it has recently lent US$ 500M in its 7-day liquidity-providing operation to a bank at above market rates. This was the first time since February that the facility was used. Fears that more banks will seek ECB's funding because of their heavy exposure to debts of Greece and other debt-ridden countries increased and would make the market outlook negative. Concerns over contagion of Eurozone's sovereign crisis have spread to the US. The WSJ said that US regulators are taking a closer look at the US units of Europe's biggest amid concerns that the region's debt problems will spread to the US banking system. The report said that the New York Fed is 'very concerned' about the issue and has been seeking information about the banks' ability to access funds to maintain their US operations. New York Fed President Dudley denied the officials are watching a particular group of banks closely and reiterated that the central bank treats US and European banks 'exactly the same' and is 'always scrutinizing banks'.

Tremendous uncertainties in the economic outlook and banking system in both sides of the Atlantic will persist for some time. Investment banks such as Citigroup and JP Morgan downgraded their forecasts on US growth while Morgan Stanley trimmed its global growth outlook, warning the US and Europe are 'dangerously close to recession'. We expect financial markets will remain fragile in coming weeks.

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Crude Oil: The front-month contract for WTI crude oil erased gains made earlier in the week amid worries over US recession. The selloff was exacerbated by the unexpected stock-build. Crude stockpile surprisingly rose +4.23 mmb, to 353.98 mmb as stocks in Gulf Coast surged a huge +6.26 mmb in the week ended August 12. Brent crude was strong despite a similar trend as disruption in the North Sea, Nigeria and Libya supported price. The front-month contract ended the day gaining +0.55%.

Nymex natural gas slipped with price plunging to a 5-month low of 3.843 Thursday before settling at 3.94 Friday. The benchmark contract lost -2.96% on weekly basis. According to the DOE/EIA, gas storage climbed +50 bcf (consensus: +48 bcf) to 2833 bcf in the week ended August 12. Stocks were -175 bcf below the same period last year and -73 bcf, -2.5%, below the 5-year average of 2906 bcf. As far as rig count is concerned, Bake Hughes reported that the number of gas rigs rose +4 units to 900 in the week ended August 19. Oil rigs added +11 units to 1066 and miscellaneous rigs remained unchanged at 8 units, sending the total number of rigs to 1974 units during the week. Directionally oriented combined oil, gas, and miscellaneous rigs fell -13 units to 227, while horizontal increased +15 units to 1138 and vertical increased 13 units to 609.

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Precious Metals: With the exception of palladium, all commodities under our coverage jumped during the week. Silver was the best performer, followed by gold and platinum. The strength of these precious metals was attributed to the slowdown in global growth outlook, large fiscal deficits, low interest rate-environment in developed countries, heightening inflationary pressures and political and economic uncertainties. The issues, despite governments' resolutions, will persist (low interest rate-environment will persist for several years) and will continued to support the precious metal complex for some time.

Gold price surpassed platinum price earlier in the month for the first time since December 2008 as demand for safe-haven assets drove investors to the yellow metal from risk assets. In 2008, gold price exceeded that of platinum four times (December 12, 15, 17, 18) and we would not be surprised to see gold trade above platinum more sustainably this time.

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While both metals are categorized as precious metals, industrial demand makes up over 80% of total platinum demand (with autocatalytic demand taking up more than one-third of total demand) but it only accounts for around 10% of total gold demand. The 'industrial' characteristic in platinum makes its price movement more synchronized with stocks, oil and other 'higher risk assets'. Therefore, it tends to lose its glitter to gold during economic turmoil and uncertainty. On the contrary, gold is often considered as a store of value and a hedge against inflation. It's especially attractive when global central bankers are competing to devalue their countries' currencies so as to stimulate growth.

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World Gold Council released its latest gold demand trend last week. According to the council, total global demand fell in 2Q11 fell -17% y/y in volume terms but increased +5% in value terms. Strong growth in jewelry was offset by a drop in investment demand, especially from ETF and similar products. We believe the apparently underperformance in ETF investment was due to high base effect as ETF demand in 2Q10 was the second large one on record.

Geographically, Indian and Chinese demand grew +38% and +25% respectively in 2Q11 from the same period last year. World Gold Council expects the growth to continue in the second half of the year, thanks to 'increasing levels of economic prosperity, high levels of inflation and forthcoming key gold purchasing festivals'. Other factors supporting gold demand in 2H11 include sovereign debt problem in the Eurozone, downgrading of US debts, inflationary pressures and the for economic growth outlook in developed countries. These factors will continue to support official sectors in remaining net purchasers of gold and are all likely to 'drive high levels of investment demand for the foreseeable future'.