The broad-based selloff yesterday began in Asia yesterday and accelerated in European and US sessions as economic data released was disappointing and policymakers' comments about outlook were bearish. Wall Street tumbled with DJIA and S&P 500 Indices plunging -1.32% and -1.45% respectively. Treasuries rallied, sending yields to new lows. In the commodity sector, crude oil and base metals slumped with the front-month WTI contract sliding -2.44% to close at 71.63 and the LME metal index, a normalized average of future prices for the 6 metals (Aluminum, Copper, Nickel, Zinc, Tin and Lead) over 3 maturities, losing -1.56% to 3250.5. Precious metals initially declined but then pared losses and ended with modest gains amid safe-haven demand. The benchmark contract for gold fell to as low as 1211.7 before jumping to 1233.4, up +0.40% at close. Silver rallied more than +2% while PGMs climbed modestly.

Market sentiment was pounded after a new BOE MPC member Martin Weale said in an interview that the UK faces a 'real risk' of a second recession. The central bank's latest economic forecasts are 'putting a significant chance on the economy contracting over a four-quarter period' and the risk of a new financial crisis 'can't be regarded as trivial'. Meanwhile, Nobel Prize winning economist Joseph Stiglitz warned that fiscal consolidation measures in Europe is hampering growth. Stiglitz said that 'because so many in Europe are focusing on the 3% artificial number, which has no reality and is just looking at one side of a balance sheet, Europe is at risk of going into a double-dip'. Yields of German bunds fell to record lows after the comments and yield spreads between peripheral European and German bonds widened. The situation was exacerbated after S&P Ratings downgraded Ireland's long-term sovereign credit rating by 1 notch to AA-, citing the country's net general government debt will rise toward 113% GDP in 2012, a level more than 1.5 times the median for the average of Eurozone nations and 'well-above' the debt borne by other Eurozone nations with similar ratings. S&P stated that a further downgrade is possible if 'the fiscal cost of supporting the banking sector rises further, or if other adverse economic developments weaken the government's ability to meet its medium-term fiscal objectives'.

The US existing home sales data came in much weaker than expected. Sales slumped -28.7% to 3.83M in July while the market had anticipated a drop to 4.63M. The lowest reading since 1995 reflects a payback from the expiration of tax credits as well as dismal employment situation. Today's new home sales data should give more evidence on the grim state of the US property market.

At a speech in Indianapolis, the Chicago Fed President Charles Evans warned that US economy is not 'out of the woods'. Evans said he's 'increasingly uncomfortable with the lack of noticeable improvement in the labor market'. With the recovery seeming to be 'extremely modest', he may be revising lowering his 2010 forecast. Evans said he will support further easing if uncertainty of the sustainability of the recovery grows.

After the market close, the industry-sponsored API reported crude inventory dropped -1.85 mmb to 356.76 mmb in the week ended August 20. However, gasoline and distillate stockpiles rose -1.88 mmb and +0.69 mmb respectively. The US Energy Department will probably report builds in crude oil and distillate but draws in gasoline inventories.

Weekly change in inventory as of 20/08/10 ChangeMarket Expectation Previous
Crude oil  +0.30 mmb-0.82 mmb
Gasoline  -0.45 mmb-0.04 mmb
Distillate  +1.00 mmb+1.07 mmb

Comparison between API and EIA reports:

API (Aug 20)

EIA (Aug 20)

Forecast (using API's inventory level)Inventory
Crude oil-1.85 mmb356.76 mmb+5.87 mmb

+2.58 mmb

357 mmb
Gasoline+1.88 mmb227.42 mmb+2.03 mmb
+4.07 mmb227 mmb
Distillate+0.69 mmb168.40 mmb+2.00 mmb
-5.81 mmb168 mmb

API collects stockpile information on a voluntary basis from operators of refineries, 76% of the time, using data in the past 4 years.

Source: Bloomberg, API, EIA