Gold shines as economic uncertainty prevails

In the last week, Spot Gold prices gained around 1.0% as rising uncertainty over the global economic scenario led to higher demand for the yellow metal as a safe-haven asset. Economic data from the major economies in the recent past has not been satisfactory and has led to concerns over slow recovery in growth in countries like the US, UK, Euro Zone and China. Investor sentiment continues to remain mixed due to no clear direction over economic progress. In the global financial markets, economic recovery has currently taken centre stage and data from major economies is currently driving risk sentiments. Fears of a double-dip recession have gripped the financial markets and this is the main factor which is boosting demand for gold.

Spot Gold prices touched a high of $1,237/oz in the last week and prices on the MCX touched a high of Rs18,790, gaining 0.9% on a week-on-week basis. Sharp gains in gold prices on the MCX platform were capped on the back of Rupee appreciation. But festive season buying in India is expected to boost demand and lead to higher prices. The Rupee is expected to trade on a volatile note as market sentiments remain mixed. If risk aversion holds grip in this week then the currency is expected to depreciate, thereby helping gold prices on the MCX to rise.

Holdings of the SPDR Gold Trust rose to 1,295.51 metric tons as of 18th August from 1,294.60 metric tons the previous day. SPDR Gold Holdings had touched a record high of 1,320.43 metric tons on 29th June. Uncertain economic scenario is expected to lead to increased demand for gold in the short-term.

Factors that will boost demand for gold

·         Gold imports in India gained 18.9% to 155.6 tonnes in the first six months of this year. Demand for gold in the Indian markets is expected to rise as a good monsoon is expected to raise rural incomes. Rural consumers are expected to flock to gold for investment as well as jewelry requirements.

·         China is allowing more banks to import and export gold for consumption purposes. The country has also opened up gold trading to foreign companies. China is the world's largest gold producer but the country had to import 100 tonnes of gold on the back of rise in demand. China's share of global gold demand has risen to 11% in 2009 from just 5% in 2002.

Fundamental Outlook

Global financial markets are currently concerned over a double-dip recession. Recovery in the US, the world's largest economy is under doubt as unemployment rate in the country continues to hover around 10%. This indicates that the US job market is currently weak. Also, credit is locked up tight and the housing market is awash in unsold and uninhabited homes. The US Federal Reserve left its benchmark interest rate at 0-0.25% and said that it would keep rates low for an exceptionally long period. The central banks said that it would buy government debt by reinvesting proceeds from its mortgage bond portfolio into long-term Treasury securities.

Growing uncertainty over the impact of the Euro area sovereign debt crisis coupled with slow progress on the US economic front is dominating market sentiments. Debate on whether economic recovery has picked up pace or no also continues. Chinese economic growth is also witnessing a slowdown as the GDP growth in the second-quarter in China slowed down to 10.3% against growth of 11.9% in the first-quarter. The overall global economic scenario is bleak and demand for precious metals as a safe-haven is expected to rise.

We have a positive view on Gold from a short-term perspective as growing economic uncertainty will raise demand for gold as a safe-haven. But sharp gains in Gold prices could be capped as the DX is expected to strengthen.

Commodities Update – August 7, 2010

International Perspective

The commodities segment made substantial gains in the last week, with natural gas prices being the exception. Base metal prices continued to lead the rally in the commodities segment, whereas gold prices also rebounded after falling drastically in the earlier weeks.

Zinc prices were the top performers in the base metals pack, gaining more than 4.5% on the MCX in the last week. The metal prices were supported by improving inventory scenario on the LME coupled with decline in zinc output in China. Zinc experienced the sharpest production decrease among all the base metals in June, posting a drop of 26,000 tonnes from the previous month. LME zinc inventories declined in all the sessions of the last week.

Lead prices continued to post strong gains for a third consecutive week, gaining more than 4% in the last week. Lead prices touched a 14-week high of Rs 102.80/kg, mainly helped by the weakness in the US dollar index (DX). However, long-term fundamentals for lead continue to remain mixed. China's June lead output rose by 14.29 percent from the previous month. Estimates from International Lead and Zinc Study Group (ILZSG) suggest that the lead mine production will total 4.2 million tons in 2010; 5% greater than the previous year.

Natural gas prices lost more than 8% in the last week on reports that natural gas drilling rigs rose by 11 rigs to 983 rigs in the last week. Despite expectations of hot weather increasing demand for the commodity, the ample supplies in the US storage seem sufficient to meet the needs. Natural gas storage increased by 29 bcf as against the previous of 28 bcf in the w/e July 30th.

Agri Perspective: Soybean and refined soy oil gains substantially in agricultural commodities in the last week. Soybean prices surged sharply on account of continuous rise in overseas market due to dry and hot weather in USA and US Department of Agriculture's weekly export sales figures of soybean was well above trade expectation. As per Solvent Extractors Association of India (SEAI), India's oil meal exports in July 2010 increased 39% to 241,182 metric tonnes from 173,329 tons a year earlier also provided support to the bulls.

Refined soy oil surged in tandem with overseas market. Crude Palm Oil (CPO) futures at Bursa Malaysia Derivative Exchange surged due to increased demand of edible oil from Muslim countries ahead of Ramadan (fasting month). Also, cheaper prices of CPO compared to other edible oils, added bullish market sentiments as India is a major importer of Palm oil. India is likely to import 5.5 to 6 lakh tone of Palm Oil for August. India is the world's second-largest vegetable oils consumer after China, may purchase more palm oil in the next two months than soy oil, as palm oil discount has widened.

Maximum fall was witnessed in NCDEX Turmeric, Jeera, Pepper, Chana and Guar Seed.

Turmeric Prices slipped more than 4 % due to higher production estimates for 2010-11 and poor demand from overseas market.

Jeera prices witnessed downtrend due to lower quotes offered by Syria in international markets. Syria is one of the major producing nations of Jeera.

Black Pepper prices closed in red in last week due to harvesting progress and fresh arrivals in Indonesia. Lower quotes by Indonesia in international market are also pressurizing prices in the domestic market. Indonesian origin was being offered at $3,950-$4,000/tonne whereas Indian origin was offered at $4,400-$4,450/tone.

Weekly Performance of Currencies

The Indian Rupee (INR) delivered good performance in the last week as the currency appreciated more than 1% to close at 46.42 against its close of 46.94 in the previous week. The currency rose to a one-month high in the last week as initial public offerings on the domestic equity front led to a rise in capital inflows. FII inflows in the month of July 2010 stood at Rs16,617cr against Rs10,508cr in June 2010. Year-to-date FII inflows in India totaled Rs47,694cr. Weakness in the US Dollar Index (DX) also provided strength to the INR. The RBI raised the repo rate by 25 basis points to 5.75%, whereas the reverse repo rates were increased more than market expectations. Reverse repo rate was increased to 4.5% from the previous of 4%. However, the CRR rate was left unchanged at 6%. The central bank also raised its March-end inflation forecast to 6% from the previous estimate of 5.5%.

Economic data from the US, the world's largest economy has come on the negative side in the last few days. This has led to lower expectations of a rise in interest rates in the US any time in the near future. On the back of this, the DX depreciated in the last week to close at 81.54. The DX weakened despite mixed sentiments in the financial markets, which is neither too positive nor very negative. Performance of the Euro was good as the currency gained 1% in the last week as slow and steady recovery in the Euro Zone and positive economic data provided support to the currency.

The German consumer climate index increased to 3.9 in July as against expectations and the previous figures of 3.6. Moreover, the M3 money supply in the Euro zone grew by 0.2% in June as against the expectations of 0.1% decline. In the previous month of May, the money supply had declined by 0.1%.
Loans to the private sector rose by 0.3% in June as per data reported by the European Central bank (ECB). Positive economic data has led to re-emergence of demand for the Euro despite the impact of the ongoing sovereign debt crisis.

Economic Update
• Moody's Investors Service upgraded India's currency rating to Ba1, just a notch below the investment grade, taking into consideration the recent reforms adopted by the government to reign in the fiscal deficits.
• New Home sales in the US increased to 330,000 in June as against 267,000 in May. Markets had expected the new home sales to increase to 317,000.
• The advance GDP figures reported on Friday indicated that the US economy grew at a slower pace in the second quarter on the back of slowdown in consumer spending. The world's largest economy grew at 2.4% in the second quarter as against expectations of 2.5%. In the first quarter, the US economy grew by 3.7%.
• The revised consumer sentiment index improved slightly in July. The index reported figures of 67.8 in the current month from 66.5 in the previous month. Markets had expected the consumer sentiment to rise to 67.3. Moreover, the Chicago PMI also increased to 62.3 in July as against 59.1 in the previous month.
• The IMF in its stress tests said that the US financial system remains fragile and might need around $76 billion in additional capital. Despite the financial system approaching towards stability, poor economic scenario has enough potential to bring the financial system into trouble.
Outlook
In this week, we expect the Indian Rupee to trade with an appreciation bias as weakness in the DX coupled with continuing inflows in the domestic markets will help support gains in the currency. Poor economic data from the US will continue to cap rise in the DX and we expect the currency to weaken in this week. We expect the Indian Rupee to trade in the range of 45.85 to 47.15 in this week.

Currencies end week on a flat note

In the last week, major currencies closed almost on a flat note. The US Dollar Index (DX) traded with a negative bias in the last week but closed flat. The Indian Rupee (INR) depreciated marginally by 0.3% to close at 46.94 and the Euro fell slightly by 0.1%. Mildly bullish sentiments in the last week coupled with the European banks stress test results kept sharp gains in the currencies under check. Economic data out of the US in the last week continued to come on the negative side.

In the initial part of the week, equity markets traded on a mixed note awaiting the European banks stress test results. However, the results of the tests came in against expectations as 92% banks passed the tests. On the back of this, sentiment turned bullish by the end of the week as the stress tests data showed that the European banking scenario is not as bleak as expected.

The INR depreciated to a level of 47.41 in the last week as a weak start on the equities front in the beginning of the week restricted gains in the currency. Week-on-week too, the currency weakened as sentiments remained largely mixed. FII inflows in India in the month of July totaled Rs.10,126cr. In the month of June, FIIs bought equities worth Rs.10,508cr and year-to-date inflows stand at Rs.41,203cr.

Economic Update

·         The demand for the US financial assets also declined in May. Global demand for the financial assets totaled $35.4 billion in May as against the previous figures of $81.5 billion in April.

·         In the last week Ben Bernanke in his testimony before the Senate Banking Committee said that US has very little probability of being affected by deflation. However, he also added the Federal Reserve has possible tools to prevent it. Moreover, the Fed chairman also said that the employment scenario remains a major concern for the US.

·         Unemployment claims in the US increased by 37,000 to 464,000 in the last week.

·         Existing home sales increased by 5.37 million in June as against forecasts of 5.18 million.

·         Current account deficit in the Euro area widened in the month of May. The European central bank said that deficit increased by 5.8 billion Euros in May from 5.6 billion in April. Markets had expected the deficit to narrow down to 3 billion Euros.

·         The Euro zone manufacturing PMI increased to 56.5 in July from 55.6 in June. Markets had expected the index to decline to 55.2. The Services PMI also increased to 56.0 in July as against 55.5 in the earlier month.

Fundamental Outlook

The Reserve Bank of India (RBI) is expected to give its monetary policy review on 27th July, 2010. The central bank is expected to tighten monetary policy by raising interest rates by another 25 basis points. RBI has lifted rates three times since March by 25 basis points each. In this week we expect the INR to appreciate as higher risk appetite coupled with continuing inflows in the country will help support gains in the currency. Weakness in the DX is also positive for the INR. We expect the INR to trade in the range of 46.75 - 47.60 in this week with an appreciation bias.

Refined Soybean Oil

Global Vegetable Oil Supply and Distribution at a Glance:
Current Scenario of Global Major Vegetable Oil Supply and Distribution: World production of vegetable oil for 2010-11 is projected at 146.64 million tonnes. Indonesia accounts for 19.30% of world vegetable oil production. While Malaysia 14.26%, China 12.55%, EU 11.40% , USA 6.58%, Argentina 6.15%and India accounts for 4.85% only. World vegetable imports for 2010-11 are projected at 58.36 million tonnes. China accounts for 18.30% and India accounts for 17.60% of world vegetable oil import. China, EU and India consumes about 50% of total world domestic consumption of vegetable oils.

Current Scenario of Global Soybean Oil Supply and Distribution: World production of soybean oil for 2010-11 is projected at 39.964 million tonnes. China accounts for 23% of world soybean oil production. While USA 21%, Argentina 19%, Brazil 16%, EU 6% and India accounts for 3% only. World soybean oil imports for 2010-11 are projected at 8.852 million tonnes. China accounts for 24% of world soybean oil import and India accounts for 14% only.
World Palm Oil Imports Scenario: World Palm oil imports for 2010-11 are projected at 37.377 million tonnes. India accounts for 22% of world palm oil import, while China 19%, EU 14% and Pakistan accounts for 6% only.

India's Current Scenario of Edible Oil Production: Domestic vegetable oil production was 63.7 lakh tones in 2009-10 and it is projected at 70.9 lakh tones for the year 2010-11, which is not sufficient to meet domestic requirement. India needs to import more than 50% vegetable oil to meet their demand. Soybean, mustard and cotton seed oil are major contributor in total production, which accounts for about 60% of total domestic production.

Weekly Market Commentary of Refined Soy Oil: NCDEX August soybean oil prices rallied in the last week and breached its contract high of Rs 460/10 kg on account of firm global market and finally it managed close at Rs 467/10 kg with a gain of about 3% as compared to previous week's close of Rs 454/10 kg. Refined soy oil futures at Chicago Board of Trade (CBOT) surged due to hot and dry weather, which may impact on yield. Weakness in the US dollar also added bullish tone. Domestic edible oil demand improved slightly on account of rainy season. Edible oil import declined in the month of June also favored the bulls in short term. As per Solvent Extractors Association (SEA) data, the import of vegetable oils has slumped by 6% on a month on month basis in June 2010 to 7.32 lakh tonnes. The overall import of vegetable oils during November 2009 to June 2010 is reported at 55.81 lakh tonnes as compared to 58.23 lakh tones during the same period last year, down by 4%. Crude palm oil futures at Bursa Malaysia Derivative Exchange sparked in tandem with huge gains in soy oil futures at CBOT and better export figures of Palm Oil in the Malaysia during the period of July 1-15 as compared to previous month during the same period. As per SGS (Cargo Surveyor, Malaysia) Malaysia's palm oil exports during the period of July 1-15 was at 668,573 metric tonnes, up 11 % as compared to previous month during the same period. As per latest WASDE monthly Oilseed supply & demand report, Rapeseed production is sharply reduced for Canada due to lower harvested area, this also favored to bulls.

The USDA's weekly export sales report released on July 15, 2010, revealed that the net export sales for soybean oil sales were 13,000 tonnes for the current marketing year and 40,000 tonnes for next year for a total of 53,000 tonnes. Sales need to average 9,000 tonnes each week to reach the USDA forecast.

Fundamentals and Technical Outlook: In the coming week, prices are expected to move slightly higher on firm global market sentiments as we are major importer of edible oils. The cost of importing will increase, thereby raising the domestic prices. However, in the long term, huge stock of imported edible oil and existing better carry over stock of oilseeds this year as compared to last year will weigh on the prices. Also, poor export demand of domestic soy meal are in favour of bears.

NCDEX August contract shall find a strong support at 455/450 levels and resistance at 475/480 levels for the coming week.

Technical Indicators: On the daily charts, prices closed above its 10 Day EMA and its 20 Day EMA and MACD-Histogram is in positive territory, which indicates bullish market sentiments. 14-Day RSI is at 82.38, which is in overbought zone.

Black Pepper

Global supply scarcity and hoarding at the domestic market to keep Black Pepper prices firm.

Black Pepper, the ancient spice of India witnessed a surge of 8.56 percent in this week due to global scarcity and hoardings by the farmers in the domestic market.. Global Black Pepper production is expected to be lower at 2.79 lakh tonnes in 2009-10 as compared to 2.81 lakh tonnes in 2008-09. Pepper production in Vietnam -90000 tonnes in 2010 as compared to 135000 tonnes in 2009. Vietnam exported around 61000 tonnes till May 2010. Thus it may not be having enough stocks to sell. Pepper production in Indonesia is expected to be 22-25 thousand tonnes compared to 30-32 thousand tonnes in 2009- 2010. Not much of the carry over stocks are present with the nation. Exports from Indonesia stood at 50,640 tonnes of pepper as compared to 52410 tonnes in 2008. In first four months it exported around 5,937mt of pepper to U.S. being the most important source of pepper.

According to Spices Board, Black Pepper production in India is projected at 45,000 tonnes as compared to 48,000 tonnes in 2008-09. However, Black pepper production is expected to be lower than 45,000 tonnes in this year according to market source. Pepper exports from India fell by 22 percent to 19,750 tonnes in April-March 2009/10 from the year-earlier period as exports to main consuming countries such as the U.S. and Europe declined.

Demand from the overseas buyers especially from U.S.A. improved in the months of April to May 2010 providing support to the prices. Import of Black Pepper in U.S. from January to April 2010 stood at 19,568 tonnes as compared to 18,567 tonnes in the same period previous year. Indonesia maintained its position as the most important supplier to U.S. The reason behind being the major supplier is the lower quotes offered by them (Indonesia).

Currently according to the above statistics much of the stocks are not left with Vietnam and Indonesia. This will be friendly for the domestic price trend. Arrivals at the spot market have declined in this week to 30 tonnes as compared to 45-50 tonnes in the last fortnight. Farmers in the domestic market have earned good profits from the sale of Cardamom and Coffee so they are not in hurry to sell their produce at lower levels.

Price Trend of Black Pepper
Prices at the spot markets surged by 4.83 percent due to reduced arrivals and better offtakes by the local stockists. Internationally price of Black pepper of Indian origin surged from $3550/ tonne to $3950/tonne whereas Vietnam pepper prices were quoting around $3750/tonne. Prices at the futures traced the domestic fundamentals and surged by Rs.1,400/qtl.

Outlook
Black Pepper prices will remain firm in the coming days due to lower global availability of pepper with the major producers such as Vietnam and India. Further demand from the overseas will creep to India as Vietnam will hoard the stocks of pepper and will not readily sell its commodity till the fresh arrivals in next year. Brazil fresh crop is expected in September and they too don't have much pepper stocks. In the medium to long term domestic prices will take cues from the pepper production in Brazil and demand from the overseas buyers.
Technically, prices will find strong support at 17200 levels and thereafter 16640 levels. Resistance may be seen at 18300 levels and thereafter at 18500 levels. Any correction at the downside is good opportunity to buy.

Euro - A dead cat bounce or for real?

The Euro gained a whopping 2.3% in the last week and held near its three-week high on Friday. This is the second successive rise in the currency against the US Dollar Index (DX). The Euro held near $1.24 as investors shed short positions and after high demand for Spanish government bond auction on Thursday which eased concerns about Spain's debt-servicing abilities. Risk appetite re-emerged in the financial markets after the Spanish bond sale and led to demand for higher-yielding and riskier investment assets. Spain sold 3 billion Euros ($3.7 billion) of 10-year debt on 17th June at an average yield of 4.86 percent, less than the 5.04 percent that the bonds traded at before the sale.

Demand for the bonds was 1.89 times the amount on offer. It also sold 479.2 million Euros of 30-year debt at 5.908 percent and the bid-to-cover ratio was 2.45, higher than the 1.38 at the previous sale on 18th March. Positive sentiments also emerged after European leaders agreed to publish details of stress tests which will show the financial health of big banks next month. This helped to restore confidence in the Euro Zone and led to some support to the currency which has declined 13.5% against the DX on a year-to-date basis.

Debt concerns in the Euro Zone have eased but have not vanished. Markets are currently taking support from expected hopes of improvement in the Euro Zone scenario. Strength in the currency is mainly backed by these and may not be sustainable in the coming weeks. Greece's credit rating has been downgraded to "junk" status and this in itself indicates that the economic scenario is still bleak. Ongoing austerity measures in the European countries are not likely to reduce budget deficits immediately. Moreover, the impact of the $1 trillion rescue package to the European countries is still to be seen. Long-term negative impact of the European debt crisis is feared in the US, China and other European nations. Hence, the positive trend in the Euro may not continue for long as the fundamentals still remain weak.

Euro Zone economic data in the last week
• Industrial production in the Euro Zone increased by 0.8% in April. Industrial output increased for eleventh consecutive month in April.
• The German ZEW economic sentiment declined much more than expected in June. The economic sentiment index declined to 28.7 as against the previous figures of 45.8 in the earlier month.
• Consumer prices remained unchanged to 1.6% in the last month.
• Spain was successful in selling its 10-year bonds to the tune of 3 billion Euros ($3.71 billion) at a lower yield.
• The European Union has decided to publish results of the stress tests conducted on the region's lenders. This will lead to more transparency.
• Moody's Investors Service lowers Greece's credit rating to "junk" status.
• French government announced yesterday that it would raise the retirement age and increase income taxes on the rich to help rein in its budget deficit.
Fundamental Outlook
The debt crisis in the Euro Zone is not expected to have an immediate solution. But concerns over the debt crisis has eased and led to recovery in demand for the currency which lost sharply since the beginning of 2010. Short-term strength in the Euro is expected to remain on the back of expectations that the situation in the ailing European nations will improve. But, we expect worries on the Euro Zone front to re-emerge sooner rather than later. In the coming week, we expect the Euro to trade with a positive bias in the range of 1.2190 - 1.2600.

Indian Rupee seesaws

Global financial markets faced a dilemma in the last week amid a host of mixed news on the economic front. This led to a mixed trend in the Indian Rupee last week which closed on a flat note at 46.83. During mid-week, the Rupee received some support on account of easing concerns over the global economy as economic data from China came on the positive side. Also, economic data from India was supportive as the Industrial Production figures came in at 17.6%, the sharpest rise since December 2009. This helped to lift sentiments in the domestic markets but the positive momentum built over the last few days came to a halt as the equities closed the week in the negative territory.

What helped to provide trigger to the global equity markets mid-week was the positive economic data from China. The country's industrial output rose 16.5 percent from a year earlier, but this was less than the previous figures of 17.8%. Retail sales rose by 18.7 percent as against a previous gain of 18.5 percent. China's foreign trade and exports continued to surge in May. Data indicated that foreign trade jumped by 48.4 percent whereas exports increased by 48.5 percent.

Economic data only from China was satisfactory as the US and UK data came slightly on the bearish side. US ISM manufacturing index fell to 59.7 in May from a previous figure of 60.4 in April. The UK housing market is slowing down again, as the latest monthly survey shows that prices fell by 0.4% in May, after a 0.1% drop in April, taking the average UK house price down. UK manufacturing unexpectedly weakened in April for the first time in three months as car production dropped and factory output fell 0.4 percent from March. Retail sales inthe US unexpectedly dropped in May by 1.2% in May from a previous increase of 0.6% in April.

Fears over the sovereign debt crisis in the Euro Zone continue and the coming week could witness re-emergence of fears. Global economy continues to remain vulnerable to downside risks. The Japanese Prime Minister in his statement last week said that he fears a Greece-like crisis in Japan. The country needs to deal with its swelling national debt as the country has the largest public debt among industrialized nations at 218.6% of its gross domestic product in 2009.

This indicates that worries over the economic front have not eased and the coming week is expected to witness selling pressure. We expect this to lead to a rise in risk aversion in the financial markets which will reduce demand for higher-yielding and riskier investment assets, thereby reducing demand for equities and commodities. On the back of this, the Indian Rupee could depreciate as weak global economic news could lead to weakness in the currency.

Fundamental Outlook

The European debt crisis will continue to have an impact on the global equity markets. A package of $1 trillion to the ailing European has not helped to contain losses. We expect fears over the European sovereign debt issues to continue to haunt financial markets in the next week. On the back of this, domestic markets may witness concern over capital outflows from the country in the short-term. Hence, we expect the Rupee to trade with a depreciation bias in the coming week with support seen at 46.30/45.55 and resistance at 47.75/48.85.

Is the Euro headed for a total collapse?

The Euro slipped 2.3% in the last week marking a weekly low of 1.1953. Continuing economic concerns in the Euro Zone led to the decline in currency. Sovereign debt worries in the Euro Zone haunt financial market sentiments. Despite some positive news on support to the ailing European countries in the form of a $1 trillion rescue package the Euro continues to trade southwards. The impact of the debt crisis on the global economy is being introspected and this has led to risk aversion across the globe. Demand for higher-yielding and riskier investment assets has generally declined as investors have become cautious.

In the month of May, the Euro did receive some support after China's foreign-exchange regulator affirmed its commitment to investing in Europe. This led to hopes of improvement in the current economic scenario of the Euro Zone. But soon the optimism faded as the long-term impact of the $1 trillion bailout package coupled with slowdown in economic growth in the European region also came under scanner.

The European Debt Crisis………

Concerns of a sovereign debt crisis started developing in early 2010 as countries like Greece, Ireland, Spain and Portugal faced huge budget deficits. This led to fears over rising government deficits and debt levels across the globe. The recent events in Greece have aggravated the situation in the financial markets and the Euro Zone countries and the International Monetary Fund (IMF) agreed to €110 billion loan for Greece.

But this loan has come along with a package of harsh austerity measures which Greece has had to adopt. On the back of these ongoing economic issues, the European policymakers and the IMF agreed upon a comprehensive rescue packageworth $1 trillion which is aimed at ensuring financial stability across Europe.

The month of May has been eventful as the financial markets kept a check on the happenings and developments on the Euro Zone front. Greece has witnessed major protest by citizens against the austerity measures. Protest by way of strike led to a global sell-off in equities as the general nationwide strike in Greece turned violent. Such poor has been the capability of the Euro Zone to handle its debt crisis that the global financial markets witnessed a downside pressure and markets shivered on expectations that this will lead to another round of recession.

EU Emergency Measures

In order to prevent the situation from getting bad to worse, the European Union (EU) and the IMF have carved out an emergency rescue package of up to €750 billion ($1 trillion) in order to control the Greece's crisis from spreading. The European package has been the biggest government rescue since the G-20 leaders moved to stabilize markets after the collapse of Lehman Brothers in September 2008. But despite the announcement of this rescue package, the Euro has slumped to a more than a four-year low of 1.2109.

Following are the three components of the EU-IMF rescue package:

The first part includes a €60 billion ($70 billion) stabilization fund. This fund will be provided to the Euro Zone members who are struggling to finance its debts because of high interest rates demand by the financial markets. The second part of the emergency fund includes government-backed loans worth €440 billion ($570 billion). These loans will be issued via a Special Purpose Vehicle (SPV). The final part of the emergency fund consists of €250 billion ($284 billion) with additional contribution from the IMF.

Systemic risk continue as $1 trillion package fails to support Euro

Debt crisis in the Euro Zone is expected to be as serious as the credit crunch in the US. Hence, even after a $1 trillion rescue package to the ailing European countries systemic risk is not corrected. Despite the announcement of this rescue package, the Euro continued to decline and slumped to a four-year low. Austerity measures in the Euro Zone have become rigorous as Spain has unveiled the biggest cuts in the last 30 years and Portugal has also announced to reduce wages and raise taxes.

Spain's unemployment rate rose above 20% for the first time in more than a decade. The jobless rate rose to 20.1% in the first quarter from 18.8% in the previous three months. A 5% cut in public salaries was also announced by the Spanish Prime Minister this month. Retail sales volumes in the 16-nation euro zone were flat in March. German manufacturing purchasing managers index fell to 58.3 in May from 61.5 in April, a three-month low, and the services PMI also dropped to a three-month low of 53.7 vs. 55.2 in April.

Despite this huge rescue package of $1  trillion, what triggered a downside in European equities was the short-selling ban imposed by Germany in May. Germany's market regulator banned investors from naked short sales for 10 banks and insurers, as well as naked credit- default swaps on euro-area government bonds starting May 19. The decisions to ban short selling on these instruments led to concerns amongst investors that the crisis may get severe in the future.

Spain fights to survive

Spain is the fourth-largest economy in the Euro Zone and poor economic prospects in the country could lead to a major financial disaster. High level of household and corporate debt has left the country in an uncompetitive state. Size of Spain's economy is four times bigger than Greece and more debt worries in Spain could derail economic recovery in the Euro Zone.

Poor economic scenario in the European countries has created havoc as the political abilities of the countries have also come under scanner. Spain is especially finding it difficult to keep a grip on power as the country is caught between citizens opposing austerity measures on one hand and on the other hand investors demand budget cuts and more flexible labor markets.

The Spanish government does not have a parliamentary majority and this leads to delay in the timing for every measure in this testing time. The Popular Party in Spain has voted against spending cuts last week. But the situation in Portugal is different as the main rival parties have recently agreed on an austerity package. The Spanish government's move is being judged at every level as it promises to slash the public deficit from 11.2% of gross domestic product in 2009 to the EU guideline of 3% by 2013.

Fundamental Outlook

Public finances pose the biggest threat to the Euro Zone and the ECB said in its latest Financial Stability Report that predictions of further potential write-downs remain. Banks in the Euro Zone suffer considerable loan losses in 2010 and 2011 and this could amount to a further €195bn (£165bn) in write-downs. May has turned out to be the worst month for the European currency and equity markets in the year 2010. These concerns are expected to remain and lead to downside in the Euro. We expect the Euro to weaken in the coming week and trade in the range of 1.1690 and 1.2490.

Major economic data releases in June which will help to set the trend in the markets are Federal Reserve Chairman Ben Bernanke's speech, ECB Press Conference, US, Retail Sales, Consumer Confidence and FOMC Statement which will help to set the tone in the global financial markets.  

Euro heads for its sixth monthly fall on debt woes

Sovereign debt worries in the Euro Zone continued to haunt financial market sentiments. Despite some positive news on support to the ailing European countries the Euro slumped 2.4% in the last week. The impact of the debt crisis on the global economy is being introspected and this has led to risk aversion across the globe. Demand for higher-yielding and riskier investment assets has generally declined as investors have become cautioned. During the week the Euro received some support after China's foreign-exchange regulator affirmed its commitment to investing in Europe. This led to hopes of improvement in the current economic scenario of the Euro Zone. But soon the optimism faded as the long-term impact of the $1 trillion bailout package coupled with slowdown in economic growth in the European region also came under scanner.

The Euro is headed for the sixth monthly loss against the dollar. Concerns that the European measures to lower fiscal deficits and contain the region's sovereign debt crisis may undermine global recovery and have led to reduced appeal of the Euro. A major factor that is weighing on the Euro is the lack of coordination between its members and markets are also losing confidence in the Euro Zone leaders. On a year-to-date basis, the Euro has slumped 8% on concern that rising government budget deficits will lead to defaults and an eventual break up of the Euro region. On the back of these worries in the Euro Zone, the US Dollar Index has gained sharply as risk aversion has led to increased demand for the low-yielding dollar.

Spain loses AAA Rating on debt burden

The latest negative development that could lead to further losses in the Euro is that Spain has lost its AAA credit rating at Fitch as Europe continues to battle with its debt crisis. The European policymakers have crafted a $1 trillion rescue package for the region's weakest economies but this has not been successful in lifting sentiments. Fitch Ratings has downgraded Spain's AAA rating to AA+ and has assigned the country a stable outlook.

This downgrade in rating has come at a time when Spain is trying to cut the euro region's third-largest budget deficit as the economy is witnessing a collapse of a debt-fueled construction boom. The unemployment scenario in Spain is very discouraging as it is running at 20% and the country's once booming housing market is also suffering a slump.

Economic situation in the Euro Zone remains bleak as debt affected countries have adopted austerity measures. But the country faces challenges in implementing austerity measures. Spain has also agreed to deeper spending cuts that would help to slash the deficit to 6% of Gross Domestic Product in 2011 from 11.2% in the last year. But a cut in public wages and pensions in Spain has failed to convince markets that the country can put finances back in order with the current high borrowing costs. These ongoing worries in the Euro Zone could continue to put downside pressure on the Euro. Even if global policymakers step up efforts in order to save the crisis from spreading further, we expect risk aversion in the financial markets to remain as investors remain cautious.

Fundamental Outlook

Continuing worries in the Euro Zone and recent downgrade of ratings in Spain is expected to have a negative impact on the Euro. The currency will also take cues from the economic data announcements in the coming week. The most important being the European Central Bank President Trichet's speech on Monday. Financial markets await to hear the ECB President's view on the current scenario and measures that the central bank will take in order to prevent further worsening of the situation. We expect the Euro to trade with a negative bias in the coming week as ongoing economic worries will affect investor sentiment and the appeal of the currency is reduced further on account of downgrade of credit ratings of Spain.

Crude gets vulnerable on EU concerns

Crude oil prices on the NYMEX slumped sharply in the last week, touching a low of $68.85/bbl. Prices suffered a setback on the back of fiscal issues in the Euro Zone which could stifle global economic growth and also lead to lower demand for crude oil. This factor coupled with rising inventories in the US, the world's largest energy consumer is also leading to downside pressure on the commodity. Strength in the Dollar Index (DX) is additionally adding to downside pressure on crude oil which lost 18% in May.

Crude oil inventory data in the last week came on the bearish side as the US Energy Department  reported a rise in crude oil inventories by 900,000 barrels to a record 37.9 million barrels in the week to 14th May. Crude stored at the delivery hub in Cushing, Oklahoma rose 500,000 barrels in the week to 18^th May. This inventory data is bearish and continuing rise in inventories pose concern.

Fear of growth in oil demand grips markets

Markets are currently facing a hazy scenario. On one hand, positive economic data from the US is boosting sentiments. But on the other hand, US crude oil inventory data is negative and has failed to give a clear indication of growth in the world's largest economy. Ongoing concerns in the Euro Zone coupled with concerns of monetary policy tightening in China will continue to weaken risk appetite. Even if buying support comes in at lower levels, the overall trend in crude oil remains down. Europe's debt crisis could hurt global economic growth and slow energy demand. We also expect a slowdown in energy demand from China as the country may go on for further monetary policy tightening.

Factors affecting crude oil prices:

·         The grim economic scenario in the Euro Zone has led to concern over consumption of energy.

·         Combination of news from China and the EU debt crisis has created a scenario that markets have been dreading.

·         Chinese growth may slow as Chinese officials may have to raise capital and lending requirements further to stem price inflation as the Chinese economy is overheating.

·         Stronger DX on the back of worries in the EU.

·         Greater downside risk on the back of EU sovereign debt crisis and decrease in EU GDP.

·         Risk aversion in the markets is expected to stay on the back of forthcoming EU policy and structural decisions, success or failure of austerity drive in southern Europe, and further downgrades of debt ratings.

·         We expect the Euro to weaken on the back of these issues. Loss of risk appetite coupled with apprehension about a government induced slowdown in the Chinese economy could further keep a check on oil prices in the short-term.

Fundamental Outlook

Risk aversion in the financial markets is expected to remain. Even if we witness short period of optimism, it is doubtful that it will last long as long term effects of the European debt crisis on the global economy are expected to be negative. Crude oil is currently battling with rising inventories in the US on one hand and grim economic situation in the Euro Zone on the other hand. On the back of these issues, oil prices are expected to trade with a negative bias in the coming week. Even if the weekly opening happens in the positive territory, we expect risk aversion to re-emerge and lead to lower demand for higher-yielding and riskier investment assets in times of financial uncertainty.

Dollar - The rally to continue……

Dollar rises on concerns in the Euro Zone
The US Dollar Index (DX) gained a whopping 2% in the last week as uncertainty in the financial markets led to increased demand for the low-yielding DX. There is skepticism over the $1 trillion rescue package decided by the European policymakers. Risks relating to the implementation of the package remain and concern over public sector finances, and weakness in the banking sector could further hurt recovery in the 17-nation Euro Zone.
The economic situation in the Euro Zone remains grim and the European Central Bank (ECB) has started buying the region's government bonds. The ECB will have to keep interest rates low for a long time as stimulus measures in this time of debt crisis is of utmost importance. However, the impact of this fresh debt in order to pay off the earlier debt could prove harmful.
These debt woes in the Euro Zone have affected market sentiments and lead to risk aversion. This in turn has boosted demand for the DX which touched a high of 86.29 in the last week. The DX has found good support above 85 levels and consistent closing above this level is reiterating the concern regarding the issue in the Euro Zone.
Economic data from the US has come on the positive side and is also leading to gains in the currency. Initial jobless claims in the US fell by 4,000 to 444,000 in the week ended 8th May and reiterated hopes of a rise in interest rates in the US as positive data means progress on the economic front. The US Federal Reserve is expected to be the first amongst the major central banks to raise interest rates. This expectation will boost the dollar further in the coming week.
Risk sentiments remain subdued on economic woes
Appetite for risk and demand for higher-yielding and riskier investment assets has become restrained because of rising worries about the long-term implications of Euro Zone debt problems. The following problems will continue to drive the Euro lower which is currently trading at a 15-month low of 1.2352.
• Political and social unrest in the European countries.
• How will the heavily indebted countries in the Euro Zone get public finance under control?
• There are doubts over the ECB's new role of buying government bonds in the secondary markets to maintain liquidity and keep yields low.
• Fear of long-term inflationary pressures.
• Germany, the Euro Zone's biggest country will have to undertake cutbacks as it absorbs its share of the cost of the rescue deal.
• A cut in government spending and a rise in taxes in order to relieve debt problems.
Fundamental Outlook
Economic concerns in the Euro zone will continue to haunt sentiments in the financial markets. Mixed sentiments will continue to prevail as markets cope with two separate developments - 1) Positive US economic data and 2) economic worries in the Euro area. Economic data from the US is expected to be positive and that will help markets gain strength.
The trend in the US economic data in the last few weeks has been positive. We expect economic data from the US to come on the positive side in the coming week. If the data comes in as per expectations then it could boost hopes of a rise in interest rates in the US and lead to strength in the DX in the coming week. The DX will also gain on the back of existing economic worries in the Euro zone. Despite the rescue package of $1trillion to the ailing European countries, markets are concerned over the implementation and impact of the same in the long-term.
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Gold Shines

Gold prices gain 2.5% in the last week

Spot Gold prices have gained despite dollar strength as demand for the yellow metal has increased as it is considered as the asset of last resort. Investors have become susceptible over the uncertain financial market scenario and troubles on the Euro zone front. This has dented appetite for riskier investment assets and led to rise in demand for gold as a traditional safe-haven despite a stronger dollar. We expect gold prices to trade with an upside bias in the short-term. At the same time, the dollar is expected to strengthen further. Hence, sharp gains in the yellow metal could be capped due to stronger dollar.

The Euro slumped sharply in the last few weeks as markets remained uncertain over the Greece issue. Even though the Greece has been offered a bailout by the EU and the IMF, concern over other member’s debt woes continues. Spain, Portugal, Italy and Ireland stand next in line with their debt issues. These worries lowered the appeal of the euro which touched a low of 1.2520 in the last week. On the other hand, the US dollar gained more than 3% in the last week as economic concerns in the Euro zone led to financial uncertainty. This led to demand for the low-yielding dollar as a safe-haven. The dollar also gained on the back of positive economic data which raised hopes of a rise in interest rates in the coming months.

The global economy continues to face a dilemma as on one hand markets witness a host of positive economic data announcements from the US. But on the other hand, debt issues in the Euro Zone are making investors wary over the strength of the recovery. Issues in the Euro Zone are expected to accelerate further and this will deteriorate sentiments in the financial markets. The US is witnessing a better economic scenario as companies start hiring on the back of better business prospects. The housing market in the US has also improved and led to better sentiments across global markets. But a major driver which is China has dented market sentiments further by raising interest rates in order to curb escalating growth. Higher interest rate in the fast growing economy is raising fear of slowdown after a long recession which was mainly being seen in the Western World.

Fundamental Outlook

Economic concerns in the Euro zone will continue to haunt sentiments in the financial markets. Mixed sentiments will continue to prevail as markets cope with two separate developments – 1) Positive US economic data and 2) economic worries in the Euro area. Economic data from the US is expected to be positive and that will help markets gain some strength. This positive economic data could boost hopes of a rise in interest rates in the US and lead to strength in the dollar. The dollar will also gain on the back of existing economic worries in the Euro zone. Despite the rescue package provided to Greece, markets will now question and doubt the debt situation of other Euro member nations namely, Spain, Portugal, Ireland and Italy. This ongoing financial uncertainty regarding Euro Zone will continue to provide upside to gold prices despite dollar strength as economic worries will raise demand for gold as a safe-haven.

Major economic data releases in May which will help to set the trend in the markets are Manufacturing PMI, ECB Press Conference, Unemployment Claims, US Unemployment Rate, Retail Sales Consumer Confidence and FOMC Meeting Minutes.

Global economic issues drive commodity prices

Commodity prices in the last week were mainly influenced by news and development on the global economic front. Even though economic data from the US came on the positive side, what led to risk aversion in the financial markets was the concern over the Greece front. Performance on commodities like Gold, Copper and Crude oil was mixed during the week as uncertain and unresolved economic issues dented optimism over recovery in the US.
Base metals ended on a mixed note in the last week as mixed economic data coupled with concerns over the Greece front limited gains. But positive news related to Greece on Friday helped revive positive sentiments in the financial markets. During the week, the US Dollar strengthened as concerns over Euro zone and its debt woes led to risk aversion. But the currency gave up gains on Friday as Greece asked for a bailout from the European Union (EU) and the International Monetary Fund (IMF).

Gold prices came under pressure in the last week as the dollar strengthened. But demand for gold could resume as a safehaven in uncertain financial markets. Even though economic data from the US and China has been positive, uncertainty in the Euro zone over the debt issue continues. Financial markets still remain susceptible over debt issues in the Euro zone as the EU lifted its estimate for Greece's deficit to 13.6% of gross domestic product. Ireland overtook the southern European nation as the EU member with the largest deficit of 14.3%. Other member nations debt issues in the Euro zone remain a cause of concern and this factor will dominate movement in the Euro.

But gold prices could rise in the coming days on expectation that signs of inflation will revive demand for the metal as a store of value. India the world's largest buyer of gold jewelry faces inflation of almost 15% and consumer prices in the UK too climbed 3.4% in March. Accommodative policy by the US government is also raising risk of inflation and the yellow metal is attracting demand as a safe-haven.

Prices are mainly taking cues from the economic development and the Euro zone debt issue continues to haunt sentiments in the markets. Even though Greece receives a bailout, markets are concerned further over the other Euro zone countries like Spain, Portugal, Italy and Ireland which stand next in line with their debt woes. These worries have led to major pressure on the Euro which slumped sharply in the last week. Weakness in the Euro has revived demand for the low-yielding dollar.

We expect the US dollar to strengthen in this week as evidence of global economic recovery and a surge in the US housing market will boost expectations of a rate hike. Other than that,concerns over debt issues in the Euro zone will continue to provide support to the dollar as a safe-haven during financial uncertainty. In the last week the euro touched the weakest level against the dollar before Greece asked the EU and the IMF to activate a bailout of as much as 45 billion euros.

US Economic Update

Data from the US housing market front has been positive in the last week. New home sales in the US rose 27% in March, the highest gain since April 1963. US durable goods orders gained 2.8%, giving indications of an improving economic scenario in the world's largest economy. Unemployment claims in the US declined 24,000 to 456,000 in the week ended 17th April. This indicates that companies are now enjoying better sales and profits and are thus gaining confidence in the economy and staff retaining.

In the last week, Federal Reserve Chairman gave his speech on the US labour market saying that growth in the labour market could be slow as the number of jobs lost since the recession in December 2007 was high. But a significant amount of time will be required to restore the 8.5 million jobs that were lost during the past two years. A gradual pick up in jobs will also help to list consumer spending. The statement by the Fed Chairman indicates that slow recovery on the labour market front will dent hopes of an immediate interest rate hike by the US. Despite lower expectation of a rise in interest rates, we expect the dollar to strengthen as worries in the Euro zone could boost demand for the low-yielding currency.

Another important development in the US last week was the speech by President Barack Obama. He emphasized on the need for financial regulatory reform and modernization. New reforms may help to bring certainty in the capital and credit markets and fuel the economy by creating jobs.

Fundamental Outlook

Despite positive economic data, markets remain concerned over issues like debt-woes in the Euro zone. Debt issues in Spain, Portugal and Italy remain unresolved and this continues to haunt market sentiments. Hence, this uncertainty in the markets could lead to strength in the dollar which will lead to downside pressure on prices of dollar-denominated commodities. Commodities will take direction from movement in the dollar, economic data and corporate earnings results. On one hand, markets are witnessing positive economic data and corporate earnings results which give hope of economic recovery. But on the other hand, markets remain susceptible over debt issues in the Euro zone.

Currency Crisis in PIGS - Portugal, Ireland, Greece, Spain

The last few months have witnessed major turmoil as economic issues came up in Greece. Sovereign debt defaults by the EU member countries reduced the appeal of the 16-nation currency i.e. Euro. The currency has slipped more than 5% in this year and markets perceive a further drop in the currency as despite the bailout package offered to Greece by the EU and IMF, other EU members like Portugal, Ireland, Italy and Spain face a similar situation. In this year, the Euro got affected as concerns over the ability of Greece to tackle its deficit led to concerns of sovereign default by the country, reducing faith in the 16-nation common currency. This indicates that the country has been hit hard by a severe downturn and it may take years to solve the sovereign debt issue. On the backdrop of this crisis, markets have become very volatile and investors are now flocking to the US dollar as a safe-haven investment. The EU and the European Central Bank (ECB) is finding ways to deal with this issue.

Greece's budget deficit equals to 12.7% of the Gross Domestic Product (GDP). As per the EU criteria nations must have a budget deficit not exceeding 3%. Rising budget deficits in other EU member countries has raised further concern and dented the outlook for the Euro. This debt crisis could have a widespread effect and impact the other 16-member nations too. The EU is now supporting Greece with a bailout package along with the IMF. After the EU agreed to rescue Greece, market sentiments improved. The EU has decided that it would try rescuing Greece from sovereign default with the help of IMF. However, after Greece, countries like Spain and Portugal face severe deficit issues and this could again trigger concerns in the coming days. This could further revive safe-haven demand for the dollar.

The EU and IMF have announced details of the 45 billion euro financial aid package for Greece. The EU will offer Greece 30 billion Euros in three-year loans in 2010 at 5%. Another 15 billion Euros will be given by the IMF. Another factor that has affected the appeal of the euro is that Fitch has cut its ratings for Greece to BBB- giving it a lowest investment grade, with a negative outlook. This move is surely affecting the economic status of the Euro zone which is currently under pressure to save its economy from further hurdles.

The Greece government faces more than 20 billion Euros in debt redemptions in April and May alone this year. An equal amount would be required toward the end of the year for interest payments and honouring debt-obligations. Last week the government increased its 2009 budget shortfall to 12.9 as against the previous forecast of 12.7 percent. Greece's fiscal deficit is highest in the history of the euro zone since the inception of the common currency in the year 1999.
The country has no ray of hope and has finally advocated strong austerity measures to cut the nations highest deficit. These include lower infrastructural spending, salary cuts for public workers, higher taxes, increase in the retirement ages, etc. These measures are constantly facing opposition from the general public. The austerity measures are also affecting the political scenario as what happens on the government front finally affects the economic scenario. Policies laid by the government become crucial given the current debt laden scenario of a large number of EU members.

The fate of the Euro….

A major question that is worrying the markets is the fate of the Euro amid the debt crisis. Its fate lies on the economic status and scenario in the Euro zone. Since the Euro zone is a set up of 16-member nations which have different economic status, it makes it very difficult for the euro to sustain. Currently, countries like Spain, Portugal, Ireland and Greece are facing a tough time as they debt woes are rising. If the euro zone is unable to tackle this without taking IMF aid further for the other countries then rating will deteriorate and lead to downside pressure on the euro. Amid all this economic uncertainty in the euro zone, the dollar could gain strength as the markets perceive the dollar as a safe-haven amid economic turmoil. Going forward we expect worries in the euro zone to rise as other countries debt woes have to be dealt with. In this scenario we expect the euro to weaken against the dollar. From a long-term perspective too we feel that the global economy is recovering but in this process the euro zone is still dealing with its crisis. If economic data from the US comes on the positive side then we could witness further pressure on the euro. The currency represents the 16- member euro zone and current economic troubles in not one but five member nations is a cause of concern.

www.angelcommodities.com

Commodity Center---April 12, 2010

Copper prices rise skyward on Greece rescue package

Copper prices have rallied in the last few days, with prices touching a high of $8010 on the LME and Rs359 on the MCX. This rise in prices has been backed by declining inventories and positive economic data from the US. Even though economic issues in the Eurozone persist, positive economic updates from the US is providing support in the form of improving demand prospects from the world's largest economy. The red metal prices have rallied despite dollar strength as better economic prospects have offset the effect of dollar strength. Demand in Asia, outside China is also strong, especially Japan, Korea, Taiwan and the Middle East.

Strong fundamentals in the case of copper justify the rise in prices. Robust demand from China has been the catalyst to rising prices. Though factors like fund buying and declining inventories has helped the red metal to rise, Chinese demand has also played a major role. In 2010, copper demand in China is expected to grow between 8-10% as compared to 2009 and may exceed the 6 million tonne mark. Though China's demand may be slowing from a very high growth rate of 12% in 2009 a rise in demand by 7% would still be bullish for the copper market. In 2009, China consumed 5.7 million tonnes of copper and world consumption in the last year stood around 18 million tonnes.

Economic developments of the last week

Unemployment claims in the US increased by 18,000 to 460,000 in the week ended 3rd April as more Americans filed initial claims for jobless benefits last week. The week leading up to Easter and the two following that are usually considered volatile for unemployment claims.

FOMC Meeting Minutes indicated that recent data pointed to a noticeable pickup in the pace of  consumer spending during the first quarter, but participants agreed that household spending going forward was likely to remain constrained by weak labor market conditions, lower housing wealth, tight credit, and modest income growth. Fed officials are looking for signs of self-sustaining growth before they begin their exit from the most aggressive monetary policy in U.S. history. Comments by the Federal Reserve Chairman were not very positive as he said that the US economic rebound had yet to produce a significant recovery in jobs. Eurozone GDP for the fourth quarter slipped to 0.0% from 0.4% in the third-quarter of 2009. Unemployment in the Eurozone remained at an 11-year high and this too is a major concern for the economy. However, some economic data has come as relief to the markets as economic confidence improved in March 2010 and manufacturing growth accelerated to the fastest pace since August 2007.

The ECB President said that Greece was not in danger of defaulting its debt and this provided some ray of hope to the dwindling currency. Greece's first-quarter budget deficit fell 40% and narrowed to 4.3 billion euro from 7.1 billion euro in the same period a year earlier.

Factors that will contribute to upside in copper prices from the short-term perspective:

·         Restocking of copper

·         Demand from China

·         Supply uncertainty is expected to continue underpinning prices

·         Improving economic scenario in the US, the world's largest economy

·          

Short-term fundamental outlook

We expect copper prices to trade with an upside bias as improvement in demand coupled with positive economic data will boost prices. But $8000/tonne level on the LME is very crucial and prices will sustain as demand growth from China and the rest of Asia boosts further.

Currency Futures Market - It's Dynamics

In order to trade on the currency market platform, an investor must understand the factors that affect the currency price movement. In addition to that, it is also important to understand the fundamental factors that drive movement in the currencies. On the Indian currencies market platform the following pairs are traded - USD-INR, EURO - INR, JPY - INR and GBP-INR. Taking the first step forward, let us understand the fundamental factors that affect Rupee.

The main factor that affects the USD INR or any other currency is the demand/supply dynamics for the individual currencies. However, the demand/supply dynamics is influenced by many other factors such as interest rates, inflation, money supply, trade balance, growth in imports, exports, capital flows, overall economic growth in the country and global developments. For example, whenever the country's exports are greater than the imports, there is a huge capital inflows of the foreign currency through payments received whereas vice versa when the imports exceed the exports there is huge capital outflow from the country. In other words, rising exports increase supply of foreign currency whereas rising imports increase demand for foreign currency. However, apart from these basic demand-supply fundamentals, factors like view of market participants and expectations of growth in the country also affect the currency's demand/supply dynamics.

Who can benefit from trading in currency futures?

Both importer and the exporter can benefit from currency futures. In case of an importer, when he is entitled to make payments and if the domestic currency depreciates, then he may have to pay more amount of domestic currency to make the same payment, eventually making a loss. On the other hand an exporter will receive lesser amount if the home currency appreciates. The main objective of initiating currency forwards on the OTC market was enabling risk management (largely offloading or transforming existing currency risk of a customer). However, it is also used as an alternative investment within prescribed limits. Currency futures can be an added advantage in your investment portfolio.

What are the benefits of exchange-traded currency futures as compared to OTC Currency forward contracts in India?

·         Futures contract follow the principle of universal pricing- "One Price for All". The futures contracts are not customized like forward contracts.

·         Futures have smaller contract sizes as compared to forwards with a minimum lot of USD 1000. This enables even the small and medium enterprises to hedge their currency risks.

·         Standardized exchanges provide online trading platform, thereby enabling remote access to participants.

·         Price discovery mechanism is completely transparent. Prices are derived mainly through the demand/supply behavior of participants.

·         Settlements in futures are done through the clearing house of respective exchanges. Hence the risk of counterparty defaulting is eliminated.

Who can benefit by trading in currency futures?

Hedgers: Importers, exporters, corporate, SME's and banks can hedge on MCX-SX to mitigate their forex risk at relatively low entry and exit costs.

Traders:  Traders interested in taking short term risks for earning returns on a short term basis participate in currency trading. The traders provide liquidity in the market, thereby, enabling hedgers to efficiently transfer risk.

Arbitragers: Arbitrage in simple terms means purchasing in one market where the price is low and at the same time selling it in the other, thus taking advantage of the temporary price differential which exists between the two markets. Traders continuously wait for such differentials and try to earn some profits out of it. Arbitrage can be possible in the same market but within different contracts.