Commodities rebounded sharply on Friday as new measures announced after the EU summit boosted optimism. The 17-nation leaders proposed to create a single supervisory mechanism with the ECB involved. With such mechanism, the funds could be lent directly to banks for recapitalization without penalizing existing debt holders. Funding will be provided by the EFSF until the ESM becomes available. The bailout fund for the Spanish banking system will be financed through the EFSF for the moment and will later be replaced by the ESM. The Commission agreed to eliminate the seniority status of the ESM for this case. Moreover, EU leaders also proposed to use the existing EFSF/ESM instruments in a flexible and efficient manner in order to stabilize markets for Member States. We believe this refers to sovereign debt purchases. It's also stated that the ECB would serve as an agent to EFSF/ESM in conducting market operations.
For the coming week, the ECB is expected to lower the main refinancing rate by -25 bps to 0.75% on Thursday. Meanwhile, the BOE would also likely approve further QE measures as Governor Mervyn King and the Treasury have hinted in previous weeks regarding additional stimulating measures to boost growth. Other important events would be the RBA meeting on Tuesday, Japan's June Tankan survey, the US June employment report and PMI data from various countries.
Energy: Crude oil prices were pressured most of the week amid worries over the sovereign debt crisis in the Eurozone and signs of global economic slowdown. However, prices jumped significantly on Friday as the pleasant outcomes of the EU summit raised optimism and lifted risk appetite. The front-month contract for WTI crude oil gained +6.52% to settle at 84.96 while the equivalent Brent crude contract soared +7.50%, finishing the week at 97.8.
While some attributed the sharp correction of oil prices since the second quarter of this year to the continuous increase in Saudi Arabia output, the accusation is far from accurate. According to the DOE/EIA, while Saudi's production had reached 10M bpd in March and April, a decline back to 9.8M bpd was seen in May. Although the OPEC did not react to the recent sharp fall in oil prices at the general meeting, most member nations still favored oil price at $100/bbl. If the market indeed severe surplus and threatened the breakeven prices of the oil-producing countries, we continue to believe joint action from the cartel will be made.
Inline with other in the complex, natural gas jumped +7.58% during the week. The DOE/EIA reported that gas storage increased +57 bcf to 3063 bcf in the week ended June 22. Stocks were 653 bcf higher than the same period last year and 613 bcf above the 5-year average of 2450 bcf. Separately, Baker Hughes reported that the number of gas rigs dropped -7 units to 534 in the week ended June 29. Oil rigs stayed unchanged at 1 421 rigs and miscellaneous rigs stayed at 4 units and the total number of rigs was down -7 units to 1 959 units. Directionally oriented combined oil, gas, and miscellaneous rigs added +2 units to 235 units while horizontal rigs increased +6 units to 1 171 and vertical rigs slid -15 units to 553 during the week.
Precious Metals: The complex gained across the board with the exception of palladium. Gold traded below 1600 most of the week after breaching below this psychological level on June 21. The yellow metal slumped to as low as 1547.6 on Thursday but then staged a strong rebound on Friday. The benchmark Comex contract jumped to the highest level in more than a week before settling at 1604.2, gaining +2.39% during the week.
Gold has been performing more inline with risk assets rather than safe-haven in recent months. Thus, the price has been pressured amid worries over global economic slowdown and the debt problems in the Eurozone. Similarly, Friday's rebound was also driven by the optimism driven by the plans announced after the EU summit.