Geopolitical tensions in the Middle East and North Africa continued to dominate the headlines and directed financial market movements. Ease in concerns over oil supply disruption was short-lived as Libyan rebels rejected the peace deal offered by Venezuela. It's reported that protesters have moved westward and threatened to damage the central oil port of Ras Lanuf. Oil prices surged on worries that the unrest will spread to other oil-rich countries.

Macroeconomic indicators released last week showed that global economic recovery has gathered momentum. Yet, the market did not react as optimistic as the data suggested. China's PMI moderated further, dipping to 52.2 in February as a result of monetary tightening. However, the overall tone remains firm. At the annual session of the parliament, China's Premier Wen Jiabao confirmed annual growth and inflation targets of +8% and 4% respectively. Wen said the government 'cannot allow price rises to affect the normal lives of low-income people'.

Eurozone's PMI was also strong with peripheral countries showing improvements too. Unemployment rate in the 17-nation region fell to 9.9% in February from 10% in the prior month. In the US, both ISM manufacturing and non-manufacturing indices rose to 7-year highs in February. US' employment data have improved further. Non -farm payrolls unexpectedly added 192K in February while January's reading was revised up to +63K. Unemployment rate surprisingly slipped to 8.9% in February from 9% in the prior month.

Among the 3 central banks meeting last week, the ECB meeting caught most attention. President Trichet noted that 'strong vigilance' is warranted with a view to 'containing upside risks to price stability'. He also signaled that an 'increase of interest rates in the next meeting is possible' though reminding that it will not suggest a 'series' of rate hikes in the pipeline. Trichet's comments triggered speculations that the low-rate climate is going to change. While Fed Chairman Ben Bernanke stated at the semiannual testimony that he would keep QE2 until expiry in June and refused to rule out the possibility of further QE measures, stronger-than-expected job data have pushed market rates higher.

In the coming week, the RBNZ and the BOE will be meeting but we expect both to leave interest rates unchanged.


Crude Oil

Oil prices rallied with the front-month WTI crude oil contract surging to as high as 104.94, a level not seen since September 2008, before settling at 104.42, up +6.68%. Corresponding Brent crude added +3.42%, closing at 115.97 last week. The spread between WTI and Brent crude prices narrowed last week despite the fact that oil supply disruption in Libya affects exports to Europe more than those to the US. We believe this was partly driven by profit-taking from those whose traded WTI-Brent spreads. Another reason was strong US data spurred speculates stronger US oil demand.

Apart from crude oil, product prices also jumped as geopolitical tensions threatened oil shipments. Nymex distillate prices gained +5.40% while gasoline prices rallied +11.2%, the biggest jump since the week ended October 16, 2009. Despite price increases, cracks were lower.

Oil prices may have further room to go higher as long as unrests persist. According to the IEA, around 1M bpd out of a prevailing 1.6M bpd Libya's crude production has been shuttered. Libyan ports, which loaded 1.337M bpd of crude in 2010, are operating at reduced rates because of poor weather at the end of February and ongoing unrest. It is estimated that 500-600K bpd of crude lifted from Libyan ports in the last week. While Saudi Arabia has been trying to replace the lost Libyan crude, a perfect substitute is not in place. Meanwhile, the replacement is eating into spare capacity. Together with rising demand growth, risks of price outlooks skewed to the upside.



Natural Gas

Nymex gas resumed its decline last week, erasing all gains made in the prior week as warmer weather is expected to trim heating demand. According to the DOE/EIA, gas storage fell -85 bcf to 1745 bcf in the week ended February 25. Stocks were -9 bcf less than the same period last year and -15 bcf, or -0.9% below the 5-year average of 1760 bcf. Separately, Baker Hughes reported that the number of gas rigs fell -7 units to 899 units as of March 4. While the current level of rig counts represents the lowest level in more than 1 year and -44% below a peak of 1606 in 2008, more advanced drilling methods mean that much more gas will be extracted from fewer rigs.



Precious Metals

Tensions in the MENA region and fears of oil-driven inflation have sent gold to record highs and silver to 31-year highs. The benchmark Comex gold contract slumped on Thursday on profit-taking and ECB's potential rate hike. Price rebounded on Friday, however. Silver jumped, following gold's coattail, but price movements were more volatile.

PGMs also recorded gains after slipping in the previous week. However, both platinum and palladium failed to surpass the highs made in February. We believe the factor tempering price rallies was worries about the growth outlook. Oil prices have been surging since protests in Tunisia and Egypt have found spreading to Libya and other countries in the Arab world. Brent crude rallied above 100 in late January and WTI crude followed, rising above 100 for the first time since 2008 on February 24. Sky-high oil prices have sent inflation higher and spurred debates on central bank tightening. The market worried that growth will be hurt if oil prices rise too high and/or central bankers begin to unwind stimulus measures. These concerns dampened prices for PGMs as well as base metals.

The good news for PGMs was probably strong US auto sales in February. According to Autodata Corp, light-vehicle sales surged to a seasonally-adjusted annual rate of 13.4M in February, up from 13.62M in January and 10.38M the same period last year. Meanwhile, the decline in palladium supply from Russia is supportive for palladium prices.

Base Metals

While the LME metal index climbed higher during the week, individual metal performance remained diverse, reflecting different demand/supply fundamentals. Recent choppy trading demonstrated in the complex signaled investors' worries over geopolitical instabilities and associated macroeconomic concerns. Indeed, if the current instability in the geopolitical stage do not deteriorate further, we would view recent corrections in base metal prices as a breath after strong rallies in previous months. The jump in world PMI index signaled strength in manufacturing activities. While China showed a temporary slowdown, the Chinese government never means to stifle growth. With growth target at +8% and inflation target at +4%, we expect China to remain the biggest growth driver for base metal demands.