Q2 2010
Quarterly Outlook
US:Solid growth in Q2, but trouble looms p. 6
Japan:Bursts of growth hide underlying problems p. 8
FXto remain in extremis? p. 9
Q2 EQUity OUtlOOk:
Recovery continues p. 11
– Quarterly Outlook Q2-2010 –
2 QuaRteRly OutlOOk • Q2 – 2010
Saxo Bank, the trading and investment specialist, predicts a slowdown in fundamental data both on a monthly and a weekly
basis. the slowdown is broad and global which is a concern, although it is not yet dramatic.
leading indicator indices confirm the slowdown, but the Strategy team still expects a solid growth in Q2.
However, this growth should be weakening towards the end of the year, where markets will be nervous about the impact of
resetting Option-aRMs, alt-a mortgages and Commercial Real estate. thus, Saxo Bank’s Strategy team is revising its forecasts
for the stock market slightly lower and advises investors to show great caution in constructing their portfolios. Monetary policy
will continue to reflect a weak economic outlook and the team would be surprised to see policy rates moving higher in the cur-
rent year.
the Q2 Outlook for the global economy is a short analysis examining the global economic outlook for the forthcoming quarter.
It also discusses whether the Bank’s 2010 Financial Outlook, released in January 2010, still holds true. the Quarterly Outlook will
be followed by a Half-yearly Outlook in June.
CPI Muted - But Housing Markets On the Rise again
– Quarterly Outlook Q2-2010 –
QuaRteRly OutlOOk • Q2 – 2010 3
DaViD kaRSBØlDIReCtOR, CHIeF eCONOMISt [email protected]
CHRiStian tEGllUnD BlaaBJERGCHIeF eQuIty [email protected]
MaDS kOEFOEDMaRket [email protected]
ROBin BaGGER-SJOBaCkMaRket [email protected]
JOHn J. HaRDyCONSultING FX [email protected]
niCk BEECROFtSeNIOR FX [email protected]
anDREW ROBinSOnFX [email protected]
alan plaUGMannDePuty HeaD OF FutuReS & [email protected]
OlE SlOtH HanSEnSeNIOR MaNaGeR FOR CFD & lISteD [email protected]
4 QuaRteRly OutlOOk • Q2 – 2010
Cpi inFlatiOn OR aSSEt pRiCE inFlatiOn?
Should one be worried about inflation? excess reserves
in uS financial institutions currently stand at 1.2 trillion
uSD and the Fed has so far not communicated a plau-
sible strategy to keep it from entering the economy in
one big push. the lack of communication of a cred-
ible exit strategy for the various stability programs has
contributed to push inflation expectations higher.
We doubt that inflation expectations will go much
higher from here due to the dramatic skew in the
way monetary policy is conducted these days: Freshly
printed money is almost exclusively entering the
economy through the bank system. that is one reason
for the huge rally in stocks and a contributing fac-
tor behind the stabilization of house prices in most
countries. It is also a reason not to expect Consumer
Price Indices to show a noteworthy upside in the near
future (12-24 months), but since securitization is (very
slowly) beginning to recover from extreme rock-bottom
lows in 2008-2009 (5-10% of 2006-2007 levels), we
might begin to see more support for housing and even
Commercial Real estate.
Very dramatic differences are building globally with
some countries still experiencing falling house prices
(uS, Germany and Japan down with 23%, 28% and
6% from previous peaks). Some countries are reaching
new highs (Norway, Sweden, australia and China) and
some countries are showing rising prices but still down
from prior highs (Russia 33% lower, uk 9.1% lower,
France 7.5% lower and Canada 2% lower). these
huge differences are likely to result in very different
regional and national results for loss provisions etc. Ob-
viously, uS banks are on the hook for massive losses,
while the loss outlook for european banks is improving
due to largely stabilized and in some cases improving
european housing markets.
REal ECOnOMiC iMpROVEMEnt, BUt Only
SlOWly
Other factors also show improvement. Capacity utiliza-
tions are still massively down in most of the world, but
M a R k e t C O M M e N t: B l O a t e D O P t I M I S M t O P e a k H I G H e R ?
they are slowly growing. unemployment Rates gener-
ally stopped increasing and surprisingly started to drop
in some countries.
even though the global economy seems to be recover-
ing, it is worth reminding oneself that much of the
current growth is based on government consumption
and stimulus programs. In order to create real growth
we need to see a responsible revival of business lend-
ing to small and mid-sized companies. unfortunately,
the huge government spending is shutting out exactly
these types of companies, which typically deliver the
majority of growth. Since banks taken over by the FDIC
are still costing 30% of assets to close, they are still
engaged in wholesale lying about the value of their
assets) and even Barney Frank recently wanted HelOCs
to be written off from the currently close to par levels,
since they had zero economic value in many cases.
Bank lEnDinG anD SECURitizatiOn Still
anaEMiC
the hopes of an immediate and strong return of secu-
ritization and business lending are therefore ground-
less. the drop in uS bank lending is actually accelerat-
ing, since outstanding loans are dropping at an annual
pace of 7.99% from the top in 2008 but 14.22% so
far in the current year. No good news here.
the only good – and arguably quite important news
– in Q2 and Q3 might be a strong response to lax mon-
etary policy in the housing markets. even with ultra-lax
monetary policy, there is an upper boundary for P/e’s
in the stock market (which should be touched fairly
soon), but despite weak household income growth,
the “P/e” of the property market (Price/Rent) might
well be able to grow from current levels.
We expect an improving outlook for the housing mar-
kets to foster a continuation of the bloated optimism
currently observed in stocks, both because of the
general wealth effect and the decreased loss provi-
sions in banks (although that is still not a reason to
buy financials). the optimism should continue until the
QuaRteRly OutlOOk • Q2 – 2010 5
second half of the year where the impact of new finan-
cial regulation will become apparent for financials (and
therefore the outlook for lending and securitization).
tWO FUnDaMEntal CaVEatS
Both our Weekly uS fundamental Strength Indicator
and our monthly Global Business Cycle Indicator are
showing weakness after a strong rebound in the past
12-15 months. this is a worrying sign that is uncom-
fortably broad-based (11 out of 13 countries showing
decline in the Global BC index). this is one reason to
be cautious and also why we are more pessimistic than
consensus.
6 QuaRteRly OutlOOk • Q2 – 2010
US: SOliD GROWtH in Q2, BUt tROUBlE lOOMS
Inventories have been at the forefront of the debate
about uS GDP growth, and changes to inventories
have indeed contributed quite strongly to growth
in the second half of last year, notably in the fourth
quarter. But we expect the impact from this part of the
economy to retreat as business activity fails to pick up
to an extent that allows inventory restocking on a large
scale. there’s only so much inventory on the shelves
that can be reduced, and we are more or less at that
point already. We expect weak revenue growth in H1,
which will not be large enough to encourage a signifi-
cant replenishment of inventories. Managers across the
country will be wary of the strength of the current -
and for small businesses still very modest - recovery.
the recovery in the housing market looks set for sever-
al months on the sidelines as many potential investors
have already taken advantage of the first time home-
buyer tax credit programme. the extended version has
been a failure so far, and while we do expect demand
to crawl back somewhat in the second quarter, it will
not by anything near the level we usually see six to
twelve months after the end (manufacturing-wise, at
least) of the recession.
We are looking at 2.4% growth in the second quarter
as inventories and stimuli pick up despite the weakness
in housing. In the longer term, we await the outcome
of the second wave of mortgage resets with unease,
especially since the impressive run-up in house sales
and prices in the second half of 2009 has been – at
best - brought to a standstill.
Consumer prices have risen fairly rapidly of late, but
we believe that growth will slow down over the com-
ing quarters as persistent deleveraging puts downward
pressure on prices. the slack in resource utilization
combined with these deflationary forces will restrict
price growth to the 1-3% range in 2010 with 2.4%
expected in the second quarter.
M a C R O F O R e C a S t S
United States 2010Q1 2010Q2 2010Q3 2010Q4
Gross Domestic Product (QoQ, SaaR) 2.7 % 2.4 % 1.7 % 1.2 %
Consumer Prices (yoy) 2.6 % 2.4 % 2.0 % 1.5 %
unemployment Rate 9.8 % 10.0 % 10.2 % 10.4 %
* SaaR: Seasonally adjusted annual rate
QuaRteRly OutlOOk • Q4 – 2009 7
the eurozone and uk will see weak yet positive growth
in Q2 as both regions dig themselves out of the deep
economic hole they are in. While there are differences
between the two, the similarities are plentiful. unem-
ployment is high, private consumers are missing and
public deficits soaring, all meaning the governing bod-
ies will find it difficult to increase public consumption
without a more aggressive monetary policy.
the eurozone economy is struggling because of a lack
of internal demand, especially from the debt-ridden
countries in the southern part of the union. Budget
cuts will prevent meaningful growth in these countries,
which will impact the northern countries’ exports. un-
employment will remain high throughout 2010 and we
expect the rate to increase further to 10.1% in the sec-
ond quarter. Inflationary pressures are still limited given
the overleveraged consumers (and governments) while
capacity – both in employment and manufacturing – is
still excessive. Our CPI forecasts for the eurozone signal
that this will continue in 2010 with prices rising 0.8%
yOy in Q2.
the uk is in the same boat regarding unemployment
and growth, but we expect slightly higher prices as the
Government’s effective – price-wise - money pumping
will continue to add upward pressure to prices. We
therefore see a price growth of 1.8% yoy in Q2.
e u R O z O N e & u k : C O u R S e u N C H a N G e D , a N a e M I C R e C O V e R I e S S t R a I G H t a H e a D
United kingdom 2010Q1 2010Q2 2010Q3 2010Q4
Gross Domestic Product (yoy) -0.3 % 0.7 % 1.5 % 1.4 %
Consumer Prices (yoy) 2.7 % 1.8 % 1.7 % 1.2 %
unemployment Rate 7.8 % 7.8 % 7.9 % 8.0 %
Eurozone 2010Q1 2010Q2 2010Q3 2010Q4
Gross Domestic Product (yoy) 0.8 % 1.4 % 0.8 % 1.4 %
Consumer Prices (yoy) 0.7 % 0.8 % 1.0 % 0.8 %
unemployment Rate 10.0 % 10.1 % 10.3 % 10.4 %
8 QuaRteRly OutlOOk • Q2 – 2010
In asia, Japan is struggling to escape the deflationary
forces that continually suppress any sustainable recov-
ery. In the short term, however, we see ample room for
continued expansion as a flow of government funds is
providing the fix. the JPy has shown a good perform-
ance against the uSD the last couple of quarters, while
euRJPy has declined more than 5% in 2010 alone. We
expect JPy to weaken somewhat in Q2 against euR
and uSD, which will help out the struggling Japanese
exporters.
Japan and deflation go together like ying and yang,
and while we expect consumer prices to fall at a slower
pace in 2010 than last year, it is still deflation. Capac-
ity utilization is currently rebounding firmly from the
horror levels a year ago, but is still 18% below the
peak. Combined with an unemployment rate of 4.9%,
inflation is not an issue.
Following the sturdy 3.8% growth in Q4 we see ad-
ditional short term strength in the Japanese economy
with a growth target of 1.4% for Q2 though the risk is
presently mostly to the upside. However, the long term
outlook is still unconvincing and growth is expected to
be weak for the remainder of the year.
J a P a N : B u R S t S O F G R O W t H H I D e u N D e R ly I N G P R O B l e M S
Japan 2010Q1 2010Q2 2010Q3 2010Q4
Gross Domestic Product (QoQ, SaaR) 2.1 % 1.4 % 1.0 % 1.2 %
Consumer Prices (yoy) -1.3 % -1.6 % -0.9 % -0.6 %
unemployment Rate 5.1 % 5.1 % 5.0 % 4.9 %
* SaaR: Seasonally adjusted annual rate
QuaRteRly OutlOOk • Q2 – 2010 9
the poles of FX– the australian dollar on the strong
side and the British pound on the weak side – are
stretched to once in a generation extremes as we head
into Q2 of this year. So we’ll keep these two currencies
squarely in our sights in the coming quarter. elsewhere,
we’re most curious whether the uSD rally catches fire
again and whether the euro will resume its steep slide.
the australian dollar has reached its highest level in
a generation vs. the rest of the G-10 with its gaudy
interest rate, expectations of even higher rates in the
pipeline, the way its banking system manages to avoid
the worst of the credit crisis, and its exposure to the
white hot Chinese economy. the pound sterling, on
the other hand, has suffered as the uk was at the
epicentre of the global financial catastrophe and is still
struggling to make a case that it has a viable plan for
pulling itself out of its fiscal and economic malaise. On
top of that, the investment world is fretting the poten-
tial for a hung parliament in the wake of the national
elections that must be held by early June.
While the reasons that have taken these two curren-
cies to their current levels are compelling, we suspect
that mean reversion may be a theme worth investigat-
ing for these two currencies, particularly for the aussie.
the timing is tough to predict, but China is one of the
main reasons why the aussie rally may falter. after all,
history shows that once a country gets serious about
clamping down on an overheating economy, that’s
when the markets and the economy in that economy
often hit the skids. and China is getting serious. this
year, growth pains seem an ever increasing likeli-
hood, with all of the egregious excesses in credit and
overexpansion in production and housing capacity. a
short aussie position is one way to trade a Chinese
hiccup, since the australian economy has more or
less become a derivative of the China story, and the
aussie’s strength has reached quite an extreme. the
pound, on the other hand, is extraordinarily difficult to
make a positive case for. there are types of hope for
this currency: First, that the election fears are over-
blown and that the winning party gains a clear victory
Q 2 2 0 1 0 F X O u t l O O k : F X t O R e M a I N I N e X t R e M I S ?
Chart: GBP and AUD have reached remarkable opposite extremes in weakness and strength. Most of the times in
recent decades, currencies have shown a tendency to revert to mean after such moves, but is this time different?
10 QuaRteRly OutlOOk • Q2 – 2010
and promises an effective plan that reassures markets.
Second, that things look so bad for the sterling already
that it has been oversold and that markets often begin
to rise when things look worst.
On a more general macro note, G-10 currencies are at
an interesting inflection point here on the cusp of the
second quarter of 2010. that’s because, as we started
writing this (on the “Ides of March” – how’s that for
portent?), measures of risk appetite, which have been
so influential for the direction in many of the major
currencies over the last few years, are trying to nose
into new extremes of risk willingness since the 2008
credit debacle and ensuing recession. While in the
past we could normally depend on most of the G-10
currencies to align themselves somewhere along the
ever-dominant axis of risk appetite, the picture has
now become far more complicated with a number of
confusing cross-currents that have at least partially
disrupted the previous predominance of risk-on/risk
off. also, the last several months have shown a lack of
trending in traditional carry trades, which have been
choppy for several months even as risk conditions have
improved. the lack of cooperation from the bond mar-
ket (where yields have remained very low despite belief
in a recovery), is a likely central reason behind this,
particularly for JPy crosses. So in Q2, we will need to
watch whether bonds break out of important ranges
(most important for JPy crosses, which positively cor-
relate with yields) and whether risk can keep up a head
of steam (most important for commodity and eM cur-
rencies that positively correlate with risk appetite.)
the most significant change to sweep through the FX
market in Q1 was the rapid demise of the euro. the
Greek fiscal crisis and its implications for the rest of
the nations at the eurozone periphery and for the euro
itself caused a sea change in the market’s attitude to
the currency and whether it had the right to receive
equal status to the uS dollar as a credible reserve
currency alternative. the great euro question is far
from being answered as we head into Q2, even if the
situation seems stable at the moment. It’s a Catch 22
for the eurozone: backing up Greece is a minefield of
moral hazard. Do nothing and you possibly raise the
contagion risk and antagonize intra-eurozone relations.
this situation will continue to dog the euro again and
again in the future, though we suspect with far less
ferocity than we have seen December of last year. We
don’t expect euR strength, just perhaps a lower market
underperformance ahead.
On the short-end interest rate differential front, which
is often a key driver of exchange rate pricing and carry
trades, we suspect that relatively low inflation expecta-
tions and the underwhelming quality of growth will
keep central bank expectations from accelerating their
exit strategies much beyond what the current expec-
tations are pricing into the forward curve. this could
keep the traditional “risk on” currencies (commodity
currencies) in check somewhat relative to what one
might normally expect in relatively risk benign circum-
stances. the uS dollar could flourish in the coming
months if the public sector-driven recovery blossoms
enough to spark the idea that the uS is looking reason-
ably resilient while China is rolling over - which is nega-
tive for commodity exposed currencies and eM - and
europe is ever lagging behind in the cycle.
Q2 tRaDE iDEaS:
For the very bold, a euRauD and/or GBPauD long
trade is worth a look as a mean reversion idea. We still
prefer uSDJPy higher from here (as long as it is trading
above 90), and euRuSD lower.
QuaRteRly OutlOOk • Q2 – 2010 11
the cyclical recovery continues as predicted in our
yearly Outlook and equities are going higher on the
back of this, but it is not quite driven by the reasons
we expected. Originally we believed that the overall
risk appetite would drive equities higher, but this has
only partly been the case.
another key question for expected equity returns was
the potential for a P/e expansion. We argued that
stable or even slightly contracting equity market P/es
in 2010 were to be expected, as the risk of changes
in interest rates/bond yields was asymmetric to the
upside. But the driver has not, so far, been the change
of interest rates/bond yields. Rather ePS has been
upgraded quite significantly during the last 3 months
and this has led to a drop in the P/e ratio for major in-
dices. Currently the earnings expectations for S&P500
in 2010 is 78 uSD and for 2011 94 uSD. Bear in mind
that the realized earnings for 2009 were 60 uSD and
this would imply that earnings should grow by 30%
this year which we find too optimistic. eventually we
expect to see downward revisions, but most likely only
in the later part of the year. Obviously this will put a
downward pressure on equity markets.
But for the second quarter we expect the trend from
the first to continue. We do not think that earnings ex-
pectations are going to rise much more from here, but
due to the accommodative monetary policy and benign
inflation expectations being still in effect, there is room
for equities to rerate – even above the current ePS esti-
mates. this has been the case historically and we think
that it is going to happen this time around as well.
However there are risks to this view. In the short term
there is the risk that the spill-over effects from the sov-
ereign debt markets will resurface. We saw in February
how this theme evolved and made equity markets sour
by almost 10%. the likelihood of this theme playing
out one more time is in our view quite high, since the
underlying problems have not been solved. But as
trichet pointed out, he found it inappropriate for IMF
to help Greece. In other words eu and eCB will try
to solve their problems internally and this will make
markets rerate quite fast.
another factor that could start a sell-off in equity
markets and make the correction last longer is macr-
oeconomic headwinds. as we pointed out in the yearly
Outlook we expect this to happen in the second half of
2010, but both our short term fundamental indicators
and our longer term Saxo Business Cycle Indicator now
point towards another downturn. If this trend contin-
ues it becomes likely that we have already seen the
peak in equity markets and not as originally anticipated
during the upcoming summer.
In sum we stick to our original underlying thesis that
equities will move higher in the first half and then
lower in the second half. We have, however, revised
our forecasts a bit lower as we expect macroeconomic
data to remain sluggish and we do not anticipate
another positively surprising earnings season leading
towards further upward revisions.
Q 2 2 0 1 0 e Q u I t y O u t l O O k : O N e M O R e P u S H H I G H e R O N I l l - F O u N D e D O P t I M I S M
index Closing level at 14th of December 2009
June 2010 target December 2010 target
yearly Outlook
2nd Quarter Outlook
yearly Outlook
2nd Quarter Outlook
S&P500 1114 1250 1200 1150 1100
DJ Stoxx 600 247 275 269 260 248
Nikkei225 10106 10750 11431 10320 10029
MSCI eM 979 1180 1105 1050 998
12 QuaRteRly OutlOOk • Q2 – 2010
US
It appears the market has finally started to believe Ber-
nanke when he says that he will keep rates ‘exception-
ally low for an extended period’. Fed Funds futures see
only a 60% chance of the smallest rate hike, 0.25%,
before end-Q3 2010.
Quite right too, in our view. By any reading of the Fed
Funds rate and the ‘taylor rule’, the most acclaimed
academic study into the relationship between inflation
and unemployment targets, , Fed Funds would ideally
be substantially negative right now, and probably well
into 2011, even taking into account Quantitative eas-
ing and the possibility of further fiscal stimulus.
ever since the Fed‘s surprise hike in its Discount Rate
on 18th February, speculation has been rife as to
whether this move contained any predictive power
regarding uS Monetary policy. We believe the answer
is that it did not; raising the Discount Rate from 0.5%
to 0.75% represented merely a technical move to start
to normalize the spread between Fed Funds (the rate
at which banks borrow from each other overnight) and
the Discount Rate (the rate at which they can borrow
from the Fed, the lender of last resort). Historically, this
spread has been 100bp in order to penalise banks for
the poor cash management which may have lead them
to borrow from the discount ‘window’). the recent
move took it back to 50bp.
the diminishing effects of the inventory cycle and fiscal
stimuli should leave the unemployment rate stubbornly
stuck at around 10.0% for the whole of 2010, the
housing market is looking distinctly anaemic, with the
key existing home sales figure proving very disappoint-
ing as Government subsidy plans expire, bank lending
remains subdued, and inflation shows signs of slipping
dangerously towards at least disinflation; indeed watch
out for a possible deflation scare towards end-Q3.
We would expect the Fed’s first moves towards any
sort of tightening to be the removal of some Qe meas-
ures, but not before end-Q3. Rises in the interest rate
the FeD pays on reserves and/or rises in the Fed Funds
rate will happen between Q2 2011 and Q2 2012.
Japan
the war of words between the Ministry of Finance and
the Bank of Japan is becoming more heated by the
day, with the former desperate for the BOJ to embark
on additional Qe measures in order to combat defla-
tion; the 4th Quarter GDP deflator was -2.8% yoy.
against this backdrop, we do not expect any increase
in the BOJ’s overnight call rate (currently 0.1%), before
end-Q3. It seems increasingly likely that the BOJ will
bow to the pressure from the MOF so that we will see
some or all of the following actions within the next
quarter-reduction of the policy rate floor from 0.1%
P O l I C y R a t e S I N Q 2 a N D Q 3 2 0 1 0
QuaRteRly OutlOOk • Q2 – 2010 13
to 0.05%. this is a verbal strengthening of the com-
mitment to keep rates low, ‘for an extended period’.
We will also see inflation targeting and/or a return to
the commitment to continue Qe until core CPI settles
above zero or increases JGB purchases.
EUROzOnE
Some would say recent events have exposed the
central, unavoidable fallacy that one could construct a
monetary union without a fiscal union; the euro’s pos-
sibly fatal flaw. the jury is out as to whether Greece,
and the other fiscally challenged Southern european
countries, will be able to avoid default and/or secession
from the euro.
therefore, the last thing the eCB can afford to do is to
tighten monetary policy, for the simple reason that the
very act of sticking to austere deficit reduction meas-
ures will be inherently deflationary, possibly brutally so.
We expect to see the Refinance Rate to remain un-
changed at 1% until at least Q1 2011 and that the
eCB will provide enough liquidity to keep overnight
market rates below 0.5% during this period.
Uk
It has become almost de rigeur to refer to the uk’s
economic recovery as ‘fragile’, and for good reason.
economic growth remains anaemic and real output fig-
ures refuse to track PMI readings meaningfully higher.
Comments from Bank of england’s Monetary Policy
Committee members remain resolutely downbeat, with
Governor king leading the chorus of woe, repeatedly
refusing to rule out rejuvenation of the Bank’s paused
Qe programme.
there is also a growing suspicion that the BOe is col-
luding with the government, if not conspiring, to keep
sterling weak in order to help exporters and to ward
off the threat of deflation later in the year.
We expect base rates to remain at 0.5% until at least
Q1 2011, with the distinct possibility that Qe is reintro-
duced.
14 QuaRteRly OutlOOk • Q2 – 2010
Most commodities began 2010 as horses out of the
starting box, racing to solid gains primarily enabled
by the strong momentum that had carried over from
2009.
two themes have been the main drivers of markets so
far; worries about the economic health of some coun-
tries given the huge debts that have been built up after
the banking crisis and the stronger dollar. these two
have been linked with europe catching most of the
sovereign debt attention resulting in a weak euro and
a strong dollar. the adverse relationship between dollar
and commodity prices meant that some markets have
been struggling as the dollar continued to strengthen.
a third and very important theme later this year will be
China and their ability to keep the economy moving
forward. Worrying signs about a frightening bubble in
assets prices and unsustainable infrastructure expan-
sion is emerging and the two rounds of fiscal tighten-
ing seen so far will undoubtedly be followed by others.
Should our worst case scenario occur, commodity
markets will suffer as a consequence.
a the end of February nine out of the 22 most traded
commodities were in positive territory with lumber and
orange juice in front while cocoa and natural gas made
up the back of the pack. Heavyweight markets like
crude and gold both were hovering around zero return
with all still to play for as we head towards the second
quarter.
Some decoupling from the above mentioned dollar
commodity relation has been seen recently with both
crude oil and gold, despite several attempts to bring
prices lower, having held up very well. Measured in
euro gold made a new record high and crude reached
levels last seen in late 2008. this was initially based
on a very cold winter on the northern hemisphere but
more importantly on expectations that economic activ-
ity among developed nations will continue to improve
with most of the increased demand so far having come
from the BRIC nations.
Crude oil finds itself in a uSD 70 to uSD 84 range
with the technical picture still pointing towards the
upside. until we see a definite confirmation of an
economic pick up the market is expected to continue
range trading with a chance of reaching uSD 85 and
potentially overshoot to the upside reaching uSD 90
which represents a 50% recovery of the 2008 to 2009
sell off. Crucial support is the 200 week moving aver-
C O M M O D I t y O u t l O O k .
QuaRteRly OutlOOk • Q2 – 2010 15
age at uSD 69 with a break below signalling a deeper
correction.
Gold has so far failed to challenge its record high from
2009 having spent most of the time pivoting around
uSD 1,100. IMF gave up in their quest to offload the
remaining 190 tons out of an original 400 tons to Cen-
tral banks, choosing instead to offer it into the open
market. Central Banks will undoubtedly be the buyer
but prefer the anonymity of the open market. China,
Russia and India have been mentioned as potential
buyers and as such the overhang is not expected to
have any adverse impact on prices.
With flows into gold etFs having stalled, the market
increasingly looks towards signs of a pickup in physical
demand to drive the market higher. Safe haven buying
on the back of sovereign debt worries has been offset
by the stronger dollar and as such has been a minor
factor and continues to be so in the near future. We
are long term bullish on gold, but think that the short
term will offer better buying opportunities than the
uSD 1,120 seen at the time of writing.
Saxo Bank a/S · Philip Heymans allé 15 · 2900 Hellerup · Denmark · telephone: +45 39 77 40 00 · www.saxobank.com
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