Sentiment Hurt amid Fears that German Economy May Slow

20 May 2011 20 May 2011

BonTrade

Crude oil rebounded in NY session as the selloff earlier in the day triggered bargain-hunting. Commodities fell in European session after the Bunsdebank said that economic growth in Germany will slow. The front-month contract for WTI crude oil price plunged as much as -2.61% to 96.35 before bouncing back to 99.47 while the equivalent Brent crude contract rebounded to 112.3 after initially plummeting to as low as 108.6. Gold gained despite weaknesses in the euro and oil as intensified sovereign debt concerns drove demand for safe-haven assets. The benchmark Comex contract jumped +1.34% on Friday.

The Bundesbank said in its monthly report that growth in Germany ’is likely to ease somewhat in the foreseeable future’. The country’s economy grew +1.5% in 1Q11, following an annual expansion of +3.6% in 2010. However, the central bank said growth in the first quarter ‘considerably overstates the underlying economic momentum. Output growth was clearly lifted during the reporting period by backloading and catching-up effects’. Market sentiment was damped by the comments as Germany’s strong expansion has been the key driver for growth in the Eurozone.

Risks in Germany have exacerbated fears over the 17-nation region’s outlook which has been clouded by sovereign crisis in peripheral countries. The market remains concerned about the fate of Greece even after the EU meeting. Fitch’s downgraded the country’s credit rating to B+ with negative outlook, signaling further downgrades are possible in the near future. The rating agency said that the downgrade reflected ‘the scale of the challenge facing Greece in implementing a radical fiscal and structural reform program necessary to secure solvency of the state and the foundations for sustained economic recovery’. Fitch’s is dissatisfied with the possible agreement among EU members to extending the maturity of debts to Greek and the move will be considered as a ‘default’.

Macroeconomic data took a backseat as there’s lack of US data on Friday. In Canada, inflation missed market expectations. Headline inflation rose to ¬+3.3% y/y in April, same as the reading in March but was below consensus of +3.4%. Core inflation remained benign, gaining +1.6% in April after a +1.7% growth in the prior month, Retail sales was flat in March, easing from a +0.4% growth in February. This was disappointing as the market had anticipated an accelerated +0.9%. Excluding auto, the reading surprisingly contracted -0.1%, after rising +0.7% in February. These data reinforced the view that the BOC will not feel urgent to hike the policy rate in coming months.