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.