KASB Securities Limited and Economics Research- Commodities Corner

Karachi, July 04, 2012 (PPI-OT): Geopolitics simmers; possible ECB rate cut on the cards?

Iran cranks up the risk premium

According to KASB Securities Limited,

• Bulls clicked into high gear in the crude oil market as supply side risks from Iran and the ongoing Norwegian strike demanded a risk premium. Although the factors were more bullish for Brent (+3.4%), it was WTI which ended up outperforming (+4.7%) other crude benchmarks. In the US market, inventories remain persistently high while a run of soft data points seem to be firming up the notion that an extension in the accommodative monetary framework is warranted.

• Geopolitical risks which had earlier subsided since Iran resumed negotiations in April have re-emerged as Iran tested its military muscle yesterday adding to unease. Note that EU sanctions against the nation have come into effect with full force since 1 July.

Gold crosses US$1,600/oz; ECB and Bank of England to ease again?

• Supported by the rally in crude oil and global equities (Dow Jones +0.6%, Euro Stoxx50 +1.2%), spot gold also emerged a winner advancing by 1.3%. Although US markets are closed today owing to Independence Day Holiday, the remaining calendar of the week is littered with high-profile events.

• Expectations of an ECB rate cut have garnered steam and the market is pricing in a 25bps easing. The same has been driven by rising secondary market yields for Spain and Italy, signs of weakness in an otherwise resilient German economy, and ECB satisfaction from the outcome emerging at the EU Summit where leaders made significant strides to sort out their common issues.

• Another policy tool which market chatter indicates that the ECB could adopt is a reduction in the deposit rate which would compel banks to seek other avenues of lending rather than park the funds with the Central Bank.

• The Bank of England is also expected to enhance its bond-buying program by an additional £50billion (from £325billion). Looking ahead, US monthly payrolls data coupled with latest unemployment rate could heighten the chants for QE-III if more softness in numbers emerges.

Source: Bloomberg, Reuters

Key events/data releases

• Services PMI: Readings for the Euro zone and UK expected at 46.8 and 52.9 respectively

Gold Spot

Technical Strategy: Buy

Gold opened positive and remained strong throughout the day to close well into the green. Moreover it sustained above the 50-DMA which translates into a breakout. The Stochastic Oscillator maintains its Buy signal while the MACD has conformed to an uptrend and has now generated a Buy signal as well. What remains to be seen is if gold breaks above its resistance trend line (blue line) which looms overhead. The first support is at US$1,610.11 and second support is at US$1,602.21. The first resistance is at US$1,627.77 and the second resistance is at US$1,640.03.

Silver Spot

Technical Strategy: Buy

Silver registered a decent rise to close above its channel resistance (upper purple line) as well as the 30-DMA. This is bullish and translates into a breakout. The Stochastic Oscillator maintains its buy signal while the RSI has started to conform to an uptrend. Moreover the MACD has started to improve and has now generated a Buy signal as well. The first support is at US$27.94 and second support at US$27.57. The first resistance is at US$28.70 and the second resistance is at US$29.09.

WTI Spot (Crude Oil)

Technical Strategy: Buy

WTI gave a strong gap-up opening to close well into the green. Moreover it has given a breakout above the 30-DMA. The Stochastic Oscillator, though overbought, maintains its Buy signal while the RSI has conformed to a steady uptrend and maintains its Buy signal as well. Moreover the MACD maintains its uptrend as well as buy signal. The first support is at US$86.83 and second support is at US$85.99. The first resistance is at US$88.49 and the second resistance is at US$89.33.