Market Firm Until EU Summit on the 26th Oct 2011

Market sentiment remained firm on Monday as investors awaited the EU summit on October 26. There has been much speculation of measures to be announced to contain the intensifying sovereign debt crisis. While the advance in financial markets signaled optimism over the outcome, we would like to advise on the possibly of disappointment as it appears that policymakers remained divided.

Major issues to be discussed during the summit include the offer of the 6th tranche of the Greek rescue fund, the plan of EFSF leverage and recapitalization of European banks. Greece will likely be granted the 6th tranche of funding by the EU/ECB/IMF troika. The overhang is whether to extend the private sector involvement, currently at 20%, into the second Greek program. There have been talks that the EU will use 10-30% of the 400B euro EFSF for first-loss guarantees. Moreover, the fund will be leveraged up to to 2 trillion euro. Concerning bank recapitalization, it's possible that banks will be given 6-9 months for increasing their Tier 1 capital ratio to 9% after a Greek debt haircut. Countries such as Spain, Italy and Portugal may be offered support from the EFSF regarding bank capitalization. Policymakers may consider pooling capitals for funding banks in the medium-term.

In the US, Fed's Vice Chairman Janet Yellen mentioned about QE3 in a speech, citing 'securities purchases across a wide spectrum of maturities might become appropriate if evolving economic conditions called for significantly greater monetary accommodation'. Yellen remained concerned about the country's economy. She stated that the recovery is 'disappointingly slow' and the growth in job market will remain 'tepid in the coming months. Particularly, European debt problems are 'worrisome' and 'the potential for such adverse financial developments to derail the recovery creates… significant downside risks to the outlook'.

Commitments of Traders

Speculators were bullish on the energy complex in the week ended October 18. Net length for crude oil futures climbed +23 310 contracts to 144 371. Net lengths for heating oil and gasoline rose +12 635 contracts to 14 729 and +7 043 contracts to 52 000, respectively, during the week. Net short for natural gas futures decreased to 168 643 contracts.

Speculators were bearish on the gold and silver but bullish on PGMs. Net length for gold futures dropped -7 524 contracts to 126 978 while that for silver slipped -1 596 contracts to 10 352. For PGMs, net lengths for platinum added -503 contracts to 20 180 while that for palladium futures gained +209 contracts to 7 162.