KASB Securities Limited and Economics Research- Commodities Corner

Karachi, June 29, 2012 (PPI-OT): Magic pills being arranged to ease borrowing cost fever

Initial Takeaways from the EU Summit

According to KASB Securities Limited,

• Initial impressions emerging from the EU Summit (after market closure) saw Euro zone leaders managing to agree on the bare minimum to take immediate steps to curtail soaring Spanish and Italian borrowing costs. A move towards forming a tighter banking union also saw headway as the creation of a single supervisory body for the region’s banks was discussed.

• The permanent Euro zone bailout fund, the European Stability Mechanism (ESM) would be empowered to take exposure in sovereign debt in order to relieve the pressure on Spain and Italy’s debt. Moreover, the package would exempt imposition of strict regulatory conditions or austerity measures on Spain and Italy, as a prerequisite to the ESM picking up govt. bonds.

• Having said this, there are still plenty of pitfalls lined up as the above measures are currently in proposal format and Germany’s detailed response is still awaited, since it earlier opposed this measure. However, further consent on these proposals should be construed as a positive sign as expectations were low, heading into this week’s Summit.

Gold bruised in the build up to EU Summit

• Spot gold took a dent (-1.4%) in the build up to the EU Summit, as investors doubted the possibility that additional stimulus would emerge from the meetings. Earlier in the session, weak physical demand due to an eroding Indian currency was also cited as a reason keeping the upside in bullion prices capped.

Roller coaster ride for equities; WTI sinks to 8-month low

• Soft employment numbers and a US Supreme Court ruling upholding a Health Care Law took the market by surprise. The law requires most Americans to obtain insurance by 2014 or risk being penalized. As expected, the decision of the court hit insurance sector stocks hard which spilled over into a full fledged sell-off. However a late rally ensued as positive reports started seeping in from the EU Summit enabling stocks to close nearly flat (Dow Jones -0.2%, S and P -0.2%).

• US crude however was butchered, losing 3.1% in the process to record the lowest closing since early Oct-11 at US$77.69/bbl. Its’ European counterpart, Brent also sank 2.3% as the ongoing Norwegian strike continues to clip production.

Source: Bloomberg, Reuters

Key events/data releases

• EU Economic Summit

• Chicago PMI

Gold Spot

Technical Strategy: Sell on Strength

Gold registered a lower high and a lower low to close below its critical support trendline (black line). Moreover the Stochastic Oscillator has reversed and has generated a Sell signal while the RSI has resumed its downtrend as well. This is bearish and suggests further downside risk. The first support is at US$1,541.11 and second support is at US$1,529.36. The first resistance is at US$1,563.76 and the second resistance is at US$1,574.66.

Silver Spot

Technical Strategy: Buy on Weakness

Silver continued to witness pressure however showed a marginal recovery from its critical support at US$26.16, which was its previous bottom. The Stochastic Oscillator has shown weakness however has become oversold while the RSI is about to become oversold as well. What remains to be seen is if silver holds ground at its critical level. The first support is at US$26.16 and second support at US$25.78. The first resistance is at US$26.65 and the second resistance is at US$27.00.

WTI Spot (Crude Oil)

Technical Strategy: Buy on Weakness

WTI witnessed significant pressure to close well into the red. The Stochastic Oscillator maintains its Buy signal which makes its formation a bullish divergence, while the RSI has once again entered the oversold region. There is now a significant gap of around 24% between WTI’s price and its 200-DMA which entails a recovery. The first support is at US$77.04 and second support is at US$75.99. The first resistance is at US$78.34 and the second resistance is at US$79.38.