Market sentiment improved early in the week as there seemed to be breakthroughs in sovereign debt issues in the Eurozone and the August FOMC minutes rekindled hopes of QE3. Optimism, however, soured after release of the ISM manufacturing index and almost evaporated after the US employment report which showed no change in payrolls in August. We expect investors will remain cautious in the coming week as they await central banks' monetary decisions.

The second and third largest Greek banks, Eurobank and Alpha Bank, announced a merger which would create the country's largest bank with 146B euro in assets. Paramount Services Holding Ltd, a Qatari investment fund, will assist the merger by capital injection of 500M euro. Moreover, German Chancellor Merkel's cabinet showed support on the new EFSF which was agreed among European leaders on July 21. German Chancellor Merkel's cabinet backed the new EFSF which is given purchasing power on sovereign bonds. Germany's share in the loan guarantees is raised to 211B euro from 123B euro. Members of the GCD party are confident that they can secure a coalition majority to get approval on September 29. We believe these are just preliminary steps in resolving the sovereign crisis and confidence will turn weak again should policymakers fail to implement fiscal consolidative measures.

The minutes of the August FOMC meeting unveiled that 'a few members' preferred 'a more substantial move at this meeting'. Some members favored additional easing as they expected 'the unemployment rate to remain well above, and inflation to be at or below, levels consistent with the Committee's mandate. However, they were willing to accept 'the stronger forward guidance as a step in the direction of additional accommodation' as this was 'a measured response to the deterioration in the outlook over the intermeeting period'. Policymakers discussed a range of accommodative tools which included reinforcing forward guidance about the likely path of monetary policy, additional asset purchases, increasing the average maturity of securities holdings, reducing the interest rate paid on excess reserve balances. This raised hopes that the central bank may deliver something at the September meeting.

For the coming week, several central banks will hold meetings to discuss about monetary policies. We expect all of RBA, BOJ, BOC, ECB and BOE will leave their policy rates unchanged in September.

/

Energies: Crude oil prices strengthened for most of the week as supported by the threat of a tropical storm in the Gulf of Mexico and increase in risk appetite amid renewed speculations of Fed's QE3. Gains were pared later in the week as economic data signaled deterioration in US manufacturing activities and sluggishness in the job market. The front-month contract for WTI crude oil advanced to a 1-month high of 89.90 on Thursday before plummeting and settling at 86.45 on Friday, adding +1.27% during the week. Brent crude continued to track S&P 500's path. The front-month contract climbed earlier in the week and rose to 115.36, also the highest level in a month, on Thursday before reversal. The contract slipped to as low as 111.36 before closing at 112.33 on Friday, up +0.87% on weekly basis.

UK natural gas led commodities' gains last week. QatarGas announced that it will reduce output due to maintenance of trains 5, 6 and 7 from mid-September to early November. The ICE gas contract jumped +13.5% last week amid tighter supply expectations. The price rally, while exaggerated, indicated the increasing importance of LNG imports in the UK market. As the world's 8th largest LNG importer in 2010, the UK currently has 4 LNG import terminals with the longest one being National Grid's Grain LNG terminal on the Isle of Grain. The terminal can receive and process 160 Bcf/year of LNG. The other terminals are Teesport LNG, the Dragon LNG terminal and the South Hook LNG terminal. The UK imports 55% of its LNG imports from Qatar in 2009, suggesting the importance of Qatar as a supplier.

Data shows that UK's LNG imports represent 29% of total gas supply in 2011, up from 17% in 2010. Meanwhile, domestic production from the North Sea falls to 45% in 2011 from 49% last year. National Grid forecasts that, due to continuous decline in domestic production, around 70% of the UK's gas will have to be imported by 2020.

Nymex gas had a volatile week. Price rallied earlier in the week as supported by warmer weather forecasts and the threat of a tropical storm in the Gulf of Mexico but then reversed after US payrolls showed no change in August. The DOE/EIA reported that gas storage increased +55 bcf to 2961 bcf in the week ended August 26. Stocks were -137 bcf less than the same period last year and -60 bcf, or -2.0%, below the 5-year average of 3021 bcf. Separately, Baker Hughes reported that the number of gas rigs fell -3 units to 895 in the week ended September 2. Oil rigs slipped -5 units to 1064 and miscellaneous rigs added +1 unit, sending the total number of rigs to 1968 units, down -7 units from the previous week. Directionally oriented combined oil, gas, and miscellaneous rigs increased +10 units to 238, while horizontal dipped -4 units to 1136 and vertical dropped -13 units to 594.

/

/

Precious Metals: The complex advanced across the board with silver and gold outperforming PGMs. Look at gold, the metal consolidated within 1800-1850 for most of the week before dismal US employment situation helped price break above the range. Next week comes various central bank meetings and we expect all of them to leave interest rates unchanged. Indeed, some market participants have factored in rate cuts in the RBA and the ECB. We retain our view that gold will be supported as advanced economies will continue to keep interest rates low to boost growth.

Silver outperformed gold although its rise was driven by the yellow metal. Despite the weak fundamentals, silver has gained +40.0% in the first 8 months of the year, compared with the -32.7% rise in gold. The following chart shows the relationship before the relative performance of gold and silver and ISM manufacturing index. It suggests that during expansionary phase, silver tends to outperform gold while during contractionary phase, it underperforms gold. This is logical given that silver has heavy industrial uses. Although the August ISM index surprisingly held above 50, the detailed report was not encouraging at all. Economists believe there's a high chance for the headline reading to fall below 50 (signaling a contraction in the manufacturing sector) in September. In this case, gold may perform better than silver as we enter the last quarter of the year.

/

Sluggish employment situation will have impact on the auto sector. This, in turns, will affect PGMs prices. Autocatalytic demand takes up more than one-third of total platinum demand and over half of total palladium demand. By region, the US is the biggest consumer for palladium, representing 31.7% of total demand, followed by China (18.9%) and Europe (18.0%). The US is the third largest platinum user (19.1%) after Europe (26.8%) and China (25.2%). These figures show that a slowdown in US auto sector would have heavy impact on PGM demands, hence prices.

/

/

/

/