THE WEEK THAT PASSED / INDIAN STOCK MARKET

The market edged higher in what was a volatile week with a market- friendly Union Budget 2010-11 lifting the sentiment. Expectations from the budget drove the market either ways during the week. Small and mid-cap stocks underperformed their large-cap peers.

Market players largely welcomed the Union Budget 2010-11 presented by the Finance Minister Pranab Mukherjee in the Parliament on 26 February 2010. He proposed market friendly measures including reduction in surcharge on corporate tax, lower fiscal deficit projection, roadmap for rollout of goods & service tax (GST) and direct tax code (DTC), among others. The stock market remains closed on Monday, 1 March 2010 on account of Holi.

The Finance Minister pegged the fiscal deficit for the year ended March 2011 (FY11) at 5.5% of the gross domestic product (GDP). This is lower than the fiscal deficit as percentage of GDP of 6.9% in the revised estimates for the current fiscal. The finance minister said the government also aims to reduce the deficit further to 4.8% of GDP in the year starting 1 April 2011, and to 4.1% in the year from 1 April 2012.

Progressing further with its disinvestment drive, the government has estimated to raise Rs 40,000 crore from disinvestment in the year ended March 2011. It has also estimated Rs 35,000 crore from sale of third generation telecom auctions.

The Finance Minister in his budget speech also unveiled a roadmap for implementation of goods and service tax (GST) and direct tax code (DTC). He said that the government is confident of rollout of GST and DTC by 1 April 2011. The deadline for the GST introduction was earlier pegged at 1 April 2010.

DTC will replace the Income Tax Act whereas the GST will replace most indirect taxes at central and states levels like service tax, excise duty, VAT, cesses, surcharges and local levies.

Presenting his fifth Budget, the 74-year-old minister proposed a reduction in surcharge on corporate tax for domestic companies to 7.5% from the present 10%.

The FM said the Indian economy is in a much better position than a year ago, though challenges remain. He added uncertainty was there on account of delay in monsoon and there are concerns about food prices. He said first challenge is to quickly revert to higher GDP growth path of 9% and cross double digit growth. The second challenge is to harden economic growth to make development more inclusive. The third challenge relates to problems in government system.

The government announced before the budget that GDP in Q3 December 2009 grew 6% which was lower than estimated. Farm sector contracted 2.8% in the third quarter while manufacturing sector grew 14.3%.

The government will auction three slots each of third-generation wireless spectrum in most of its telecoms zones, including in the lucrative Delhi and Mumbai regions, from 9 April 2010, the telecoms ministry said on 25 February 2010. The government will invite applications from prospective bidders from 25 February 2010 and the last day for submitting bids is 19 March 2010.

Reports citing Oil Secretary S. Sundareshan on 26 February 2010 indicated the government may raise petrol prices by Rs 2.71 per liter and diesel prices by Rs 2.55 per liter.

The infrastructure sector output grew 9.4% in January 2010 from a year earlier, higher than an upwardly revised annual growth of 6.4% in December 2009, government data showed on 25 February 2010. During April-January, the first 10 months of the 2009/10 fiscal year, output rose 5.4% from 3% a year ago. The infrastructure sector accounts for 26.7% of India's industrial output.

Rail Minister Mamata Banerjee announced a populist rail budget for 2010-2011 on 24 February 2010, laying emphasis on the social responsibility and financial viability. The Rail Minister kept passenger fares as well as freight rates unchanged. The freight rate for food grains and kerosene was cut by Rs 100 per wagon. The Rail minister said the service charge on air-conditioned fares will be cut. Mamata's populist rail budget has many social welfare plans and job-generation schemes too.

Banerjee said that it is time for private partnership in Indian Railways, but said that the railways will not be privatised. She said that clearance to private investment will be provided in 100 days to speed up projects. Banerjee appealed to business houses to join hands for building partnership with Railways. Presenting the Railway Budget she said a special task force will be set up for early clearance of projects.

Mamata Banerjee proposed Rs 41,426 crore, the highest ever planned investment, to provide efficient, customer focused and modern railway network. However, this is a small increase of Rs 1,142 crore to capital expenditure from the previous year. There is a target to implement 1,000 route kilometer (km) in one year and 25,000 km in the Vision 2020 document, she added.

Derivatives contracts for February 2010 series expired on 25 February 2010. As per reports, about 76% positions got rolled over to March 2010 series and around 73% Nifty positions moved to March 2010 contract.

Foreign institutional investors (FII) inflow in February 2010 totaled Rs 1460.60 crore as of 24 February 2010. Their inflow in the calendar year 2010 totaled Rs 960.10 crore.

The BSE Sensex rose 237.92 points or 1.47% to 16,191.63 in the week ended Friday, 26 February 2010. The S&P CNX Nifty rose 77.40 points or 1.59% to 4922.30

The BSE Mid-Cap index fell 34.54 points or 0.54% to 6,432.36 and the BSE Small-Cap index declined 137.17 points or 1.67% to 8,204.57. Both these indices underperformed the Sensex.

Trading for the week began on a positive note as key benchmark indices logged small gains on Monday, 22 February 2010, snapping a two-day slide. The BSE 30-share Sensex rose 45.42 points or 0.28% to 16,237.05 and the S&P CNX Nifty rose 11.50 points or 0.24% to 4856.40.

Market extended gains for the second running day on Tuesday, 23 February 2010. The BSE 30-share Sensex rose 49.27 points or 0.3% to 16,286.32 and the S&P CNX Nifty rose 13.65 points or 0.28% to 4870.05.

Weak global equities and lower US index futures weighed on the key benchmark indices on Wednesday, 24 February 2010. The BSE 30-share Sensex fell 30.35 points or 0.19% to 16,255.97 and the S&P CNX Nifty fell 11.45 points or 0.24% to 4858.60.

Key benchmark indices closed flat on Thursday, 25 February 2010, after moving between positive and negative zone in intraday trade as investors preferred to stay on the sidelines ahead of the Budget. The BSE 30-share Sensex was down 1.77 points or 0.01% to 16,254.20 and the S&P CNX Nifty was up 1.15 points or 0.02% to 4859.75.

Market rallied on Friday, 26 February 2010 following announcement of a market friendly Union Budget 2010-11 by the Finance Minister. The BSE 30-share Sensex was up 175.35 points or 1.08% to 16,429.55 and the 50-unit Nifty was up 62.55 points or 1.29% to 4922.30

Index heavyweight Reliance Industries (RIL) fell 0.64% to Rs 978 in the week. RIL may reportedly raise its offer for bankrupt petrochemicals maker LyondellBasell to about $14.5 billion. RIL had previously offered a deal that valued Lyondell at $13.5 billion. LyondellBasell recently settled a dispute with creditors that has paved the way for its exit from bankruptcy.

India's largest engineering and construction firm by sales Larsen & Toubro rose 6.21% after the finance minister allocated Rs 1.73 lakh crore to develop rural infrastructure in FY 2010-2011

Auto stocks were up marginally, recovering from fall earlier during the week, as the government hiked the excise duty by 2% to 10% from 8% earlier. This came as a relief as the industry was fearing a 4% hike.

Tata Motors (up 1.88%), Mahindra & Mahindra (up 0.85%), and Bajaj Auto (up 0.43%), rose.

India's largest commercial vehicle maker by sales Tata Motors reported a consolidated net profit of Rs 650.26 crore in Q4 December 2009 as compared to a net loss of Rs 2598.83 crore in Q4 December 2008. The company announced result during market hours on 26 February 2010

India's largest car maker by sales Maruti Suzuki India rose 6.81% after the company raised vehicle prices by Rs 3,000-Rs 13,000 following hike in excise duties in the 2010-2011 Budget

Another minor positive for auto companies was higher slabs for personal income tax that would leave more finance in hands of individuals.

Metal stocks rose on strong domestic demand. Tata Steel (up 1.97%), Hindalco Industries (up 7.68%), and Sterlite Industries (up 4.72%), gained.

The government's proposal to introduce a competitive bidding process for allocating coal blocks for captive mining would ensure greater transparency and increased participation in production from these blocks. Coal is one of the key raw materials for the metal producers. The FM has also proposed to take steps to set up a "Coal Regulatory Authority" to create a level playing field in the coal sector. This would facilitate resolution of issues like economic pricing of coal and benchmarking of standards of performance.

Cigarette maker ITC tumbled 6.45% as the finance minister raised duties on smoking and non-smoking tobacco products in the Union Budget.

Banking stocks gained after the finance minister said RBI is considering giving some additional banking licenses to private sector players. ICICI Bank (up 4.98%), State Bank of India (up 3.78%), and HDFC Bank (up 0.30%), rose.

Shares of state-run bank got a boost from the Finance Minister's proposal to provide Rs 16500 crore for recapitalisation to enable them to maintain minimum capital adequacy at 8% in tier I capital by 31 March 2011.

Rail-related stocks were hammered on unwinding of speculative positions after the railway budget for 2010-2011 unveiled in parliament on 24 February 2010 fell short of market expectations.

Bharat Earth Movers (down 9.15%), Kernex Microsystems (down 22.42%), Kalindee Rail Nirman Engineers (down 22.58%), Texmaco (down 11.72%), and Titagarh Wagons (down 23.34%), declined.

The railway budget lacked big-bang announcements and had announced just a token increase in plan outlay dampened sentiment. Also the rail budget did not increase wagon orders for the next fiscal year from the current level of 18,000.

On 24 February 2010, Emmbi Polyarns settled at Rs 28.65 on BSE, at a discount of 36.33% to the initial public offer price of Rs 45. The stock listed at Rs 45.50 on the BSE, a premium of 1.11% over the issue price of Rs 45.

On 24 February 2010, DB Realty settled at Rs 455.40 on BSE, at a discount of 2.69% to the initial public offer price of Rs 468. DB Realty listed at Rs 430 on the BSE, at a discount of 8.11% over the issue price of Rs 468

On 25 February 2010, Hathway Cable & Datacom settled at Rs 207.80, at a discount of 13.41% to the IPO price of Rs 240. The stock listed at Rs 246, a premium of 2.5% over the issue price of Rs 240

Rural Electrification Corporation shot up 14.05% to Rs 244 on short-covering in the derivatives segment. As per reports, some high net worth individuals (HNIs) and foreign institutional investors were caught on the wrong foot as they had taken short positions in futures & options segments and applied for shares in the recently concluded follow-on public offer of Rural Electrification Corporation (REC) to take benefit of the price differential. They expected confirmed allotment of shares anticipating that the issue would get a poor response. But, high demand from institutional and HNI investors forced them to rush to cover open positions, triggering a 4.87% rise in the stock to Rs 223 on Wednesday, 24 February 2010.

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FOREX MARKET REPORT 25THFEB

FOREX REPORT

Yen continues to rise on the current wave of risk aversion and extends recent rally in early US session. While Greece's sovereign rating remains the center of focus, worse than expected jobless claim report from US triggers another wave of selling in yen crosses in early US session. Mixed durable goods orders do little help to lift market sentiments. Crude oil dips below 79 level again while gold is pressing 1090 level. US stocks are also set to open lower.

Greece's fiscal problem continue to pressure European major currencies. Markets are concerned by possibility of sovereign rating down grade of Greece after warnings from S&P and Moody's. Meanwhile, there were also talks that Spain is an even larger problem giving that it's still in the deepest and longest recession in half a century, the high unemployment rate of 19%, deflating house prices, huge debts a budget deficits. While Euro remains pressured, Sterling was hit even harder on concern of more quantitative easing from BoE and the risk that UK's deficit to GDP ratio would surpass Greece's this year.

On the data front, US jobless claims rose to 496k and is edging nearer to 500k level. Durable goods rose strongly by 3.0% in January by ex-transport orders dropped -0.6%. Eurozone economic confidence dropped to 95.9 in February while consumer confidence and industrial confidence were unchanged at -13 and services confidence rose to 1. Eurozone M3 money supply grew 0.1% yoy in January. German unemployment rose less than expected by 7k in February with unemployment rate unchanged at 8.2%.

As discussed before, NZD/JPY is weakest among the commodity yen crosses. The sharp fall from 64.45 indicates that recovery from 60.45 has completed already and further fall should be seen in near term towards 59.85 cluster support (38.2% retracement of 44.19 to 69.70 at 59.95. We're slightly favoring the case that NZD/JPY has topped out in medium term at 69.70 already but will focus on mentioned 59.85/95 cluster support for confirmation.

GBP/JPY Mid-Day Outlook
Daily Pivots: (S1) 138.27; (P) 138.92; (R1) 139.50;

GBP/JPY drops further as expected and reaches as low as 135.82 so far, just inch above mentioned target of 61.8% retracement of 118.81 to 163.05 at 135.70 next. At this point, intraday bias remains on the downside and break of 135.70 fibonacci level will target 100% projection of 150.68 to 138.23 from 143.59 at 131.14 next. On the upside, above 137.67 minor resistance will turn intraday bias neutral and bring consolidations. But recovery should be limited well below 143.59 resistance and bring fall resumption.

In the bigger picture, medium term rebound from 118.18, which is a correction to the long term down trend from 07 high of 251.90, has completed at 163.05 already. Decline from 163.05 is tentatively treated as resumption of the long term down trend from 2007 high of 251.09 and should target a new low below 118.81. On the upside, break of 143.59 resistance is needed to invalidate this view. Otherwise, outlook will remain bearish

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METALS AND CRUDE OUTLOOK

Crude oil remains firm after the strong rally yesterday. Currently trading at 77.2, the front-month contract for WTI crude faltered below 78 in European morning. With the lack of industry-specific data, oil prices are boosted by recovery in market sentiment and weakness in USD.

Stock markets also advance. In Asia, the MSCI Asia Pacific Index soared +1.8%, the biggest rise since November 30. Benchmark indices in Japan and Australia rose more than +2%. While China's stock is closed all week due to lunar new year holiday, Hong Kong's Hang Seng Index added +1.8% after a 2-day holiday.

In Europe, equities also rise despite some poor economic data. In the UK, Claimant counts jumped +23.5K to 1.64M in January. The reading does not only caught the market in surprise as consensus forecasts a -10K decline in claims, but was also the highest level since April 1997. The Claimant count rate stayed flat at 5% in January while the ILO unemployment rate was 7.8% in the 3 months through December, also same as a month ago.

Despite the disappointing employment report, stocks and currencies continue to go higher. UK's FTSE 100 Index edges +0.6% higher to 5277 while benchmark indices for German and France shares have gained more than +1% so far.

The pound changes little after the report, staying at a 2-week high against the dollar. For euro, Australian dollar as well as other 'risky' currencies, prices remain firm. In short, the dollar's weakness is broadly based.

Plunge in USD lifts gold. Although EU's pledge last week succeeded in soothing investors' concerns on sovereign crisis in the Eurozone, underlying fundamentals remain unchanged. While Greece stressed that the budget-reduction plan is on track and the EU said it will exert on Greece if it fails to deliver what it ought to, there's lack of detailed plans on EU's assistance and progress of Greece's recovery in its balance sheet. We believe some investors, especially for those who do not invest in USD-denominated assets, probably find gold's appeal as a safe haven attractive.

GOLD
Gold's rise from 1044.5 extends further to as high as 1124.6 so far today. While the rebound is strong, it's still limited below 1126.4. And we'd slightly prefer to case that gold as not bottomed yet. Below 1077.3 minor support will indicate that such rebound have completed and will bring fall resumption for another low below 1044.5. However, note that firm break of 1126.4 resistance will argue that correction from 1227.5 has already completed and will turn focus to 1163 resistance for confirmation.

In the bigger picture, gold has made a medium term top at 1227.5 and correction from there is likely still in progress to 100% projection of 1227.2 to 1075.2 from 1163 at 1010.7, which is close to 1000 psychological level. However, we'd expect such correction to be contained there at around 1000 psychological level and bring resumption of the whole up trend from 2008 low of 681. A break above 1126.4 resistance will indicate that such correction has completed and will turn outlook bullish for another high above 1227.5. However, note that sustained trading below 1000 will dampen our view and put 931.3 key structural support into focus.

SILVER
Silver's fall extended further to as high as 16.33 so far and remains firm. Break of 16.015 resistance argues that stronger rebound might be seen. At this point, intraday bias remains on the upside as long as 15.45 holds. Note that break of 16.95 resistance will confirm that recent fall from 18.925 has completed and will bring stronger rise to retest this resistance. On the downside, though, break of 15.45 minor support will suggest that rebound from 14.65 has completed and will flip intraday bias back to the downside for retesting this low.

In the bigger picture, silver's medium term rise from 8.4 has possibly completed at 19.50 already, after just missing mentioned 19.55/21.44 resistance zone. As noted before, such rise is viewed as part of the long term, wide range, consolidation pattern that started at 21.44 back in Mar 08. Fall from 19.50 is possibly the third leg of such consolidation pattern. We'd expect such fall to extend beyond 12.435 support to confirm this case and target a new low below 8.4 eventually. On the upside, above 16.765 support turned resistance is now needed to invalidate this view. Otherwise, outlook will remain bearish even in case of strong rebound.

CRUDE OIL
Crude oil's rebound from 69.50 extended further to as high as 77.56 and remains firm. Break of 78.04 resistance will argue that whole fall from 83.95 has finished and will bring even stronger rally to retest 83.95 high. Nevertheless, before that, there is no confirmation of reversal yet. Below 72.60 will suggest that rebound from 69.50 has completed and fall from 83.95 should then be resuming for 69.50 support and below.

In the bigger picture, prior break of medium term trend line support added some credence to the case of reversal. Medium term rise from 33.2, which is treated as a correction to fall from 147.27, should have completed at 83.95 already, on bearish divergence condition in daily MACD. Current fall from 83.95 should extend through 68.59 support towards next key cluster level at 58.32 (50% retracement of 33.2 to 83.95 at 58.58). Decisive break there will strongly suggest that whole decline from 147.27 is resuming for a new low below 33.2. On the upside, break of 78.04 resistance is needed to confirm that fall from 83.95 has completed. Otherwise, outlook will remain

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FUNDAMENTAL OUTLOOK FOR CRUDE AND METALS

Commodity market was affected by policy uncertainty last week. The Fed Chairman Ben Bernanke testified before the Committee on Financial Services on the central bank's exit strategy. Bernanke expected to consider 'a modest increase in the spread between the discount rate and the target federal funds rate' before long, while reverse repos will be among the foremost tools to drain massive liquidity.

In Europe, EU leaders pledged to provide support to Greece in overcoming the debt crisis. However, no concrete plans were mentioned. Risky assets such as equities and commodities rallied strongly earlier in the week before the meeting was held but gains were capped after the EU statement proved to be a non-event. The euro plummeted against the dollar and the Japanese as it's widely expected that EU's assistance to Greece and/or other countries with sovereign risks would result in weakness in the currency.

Towards the end of the week, the People's Bank of China announced to raise the required reserve ratio for commercial banks by +50bps. This was the second time in 2010 that the central bank raise reserve ratio as a means to slow the pace of lending. Investors were upset by the measure as it might slow down growth and demand for commodities.

Despite the strength against the euro, the dollar index slid -0.16%, the first time in 4 weeks, to close at 80.31. Reuters/Jefferies CRB Index +3.6% to settle at 267.92.

Crude Oil

The front-month contract for WTI crude dropped for the first time in 5 days on Friday as China's central bank increased required reserve ratio in commercial banks, signaling further cooling of lending. The benchmark contract plummeted to as low as 72.66 after the release of US inventory data. However, price rebounded shortly and settled at 74.13, dropping -1.5% for the day but rising +4.2% for the week.

Crude stockpile rose +2.42 mmb to 331.4 mmb in the week ended February 5. The higher-than-expected increase was driven by low refinery runs which, although rebounded to 79.11% last week, remained at historical low level.


Precious Metals
Gold price pared gains Friday amid broad-based decline in the commodity sector as well as selloff in the euro. The benchmark contract for the yellow metal settled at 1090 after plunging to as low as 1078.1. On weekly basis, the contract gained +3.5%.

Despite gold's strong correlation with EURUSD, the yellow metal managed to rise when the euro dropped against the dollar. We believe it's the heightened volatility in EURUSD that has driven investors to gold.

Although gold has the risk of weakening further in the near-term amid USD's strength, we see dips as buying opportunities as central banks in emerging markets still have strong interests in accumulating gold. Also, strength in USD should diminish as soon as the Fed hikes interest rate, probably by late-2010.

Silver gained +4.2% to close at 15.45 last week. However, since the beginning of the correction in mid-January, silver has dived -17% in month while gold has dropped -5%. As driven by worries about slowdown in global economic recovery, silver has underperformed gold so far this year. However, the sharp fall has brought the gold/silver ratio 19% higher than 5-year average, suggesting upside risk for silver against gold.

PGMs rose last week with platinum rising +2.4% and palladium +5%, after declining for 3 consecutive weeks. We are optimistic on PGMs' outlook in this year and view previous corrections as profit-taking after the rigorous rallies in mid-December to mid-January. Both robust investment demand and tightness in the market are supportive for prices.

Base Metals
Base metals rebounded strongly as risk appetite improved. Despite pullbacks on Friday after the Chinese government implemented further cooling measures, metals in the complex rose +3.8 - 12% on weekly basis.

Copper remains our preferred investment. Although imports to China dropped -21% mom to 292K metric tons in January, it's up +25% from the same period last year. SHFE price for copper futures trades at a premium to that in the LME, attracting demand for the latter.

The biggest disappointments came from gasoline and distillate. Gasoline inventory rose +2.63 mmb to 230.4 mmb, around +13 mmb above the level last year. Although demand increased +1.8% to 8.766M bpd on weekly basis, it's still -2.7% below the same period last year. Distillate stockpile drew but was less than market expected. Demand improved slightly, rising +1% from a week ago to 3.696M bpd due to cold weather in the Northern hemisphere, but remained weak compared with 4.115M bpd recorded in 2009.

Major energy agencies (US Energy Department, EIA and OPEC) revised their forecasts of global oil demand. On average, oil demand is expected to reach 85.6M bpd in 2010, up +1.4% from 2009. The forecast was also slightly higher than January's projection of 85.5M bpd, hinged on stronger expectations on economic growth. Similar to previous estimates, non-OECD countries, especially China will be responsible for the majority of demand growth.

According to the US Energy Department, the world oil market should tighten in 2010 and 2011. 'Continuation of the production targets set by the OPEC, as well as lower overall growth in non-OPEC supply over the 2010-2011 forecast period, would also contribute to a firming of crude oil prices to above $80 per barrel this summer. However, the combination of high commercial inventories among members of the OECD and ample OPEC surplus production capacity should help dampen the likelihood of any large upward swings in prices'.

OPEC revised upward its global GDP growth forecasts to +3.4% in 2010, after contracting by -0.9% in 2009, due to strength in developing Asia, with China seen growing by +9.1% in 2010, while India is forecast to grow by +7.0% in 2010. However, OECD should only expand by a mere +1.7%. Upgrade in economic outlook translated into slightly higher demand outlook with the slower pace of recovery in US demand being the major downside risk.

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FOREX METALS AND CRUDE WEEKY REVIEW

Markets were pretty steady last week until concern of Greece deficit contagion across Europe intensified on Thursday and rocked financial markets around the world. Credit-default swaps on the debt of Greece, Spain and Portugal rose to record highs today amid concern that European governments will struggle to fund their deficits. There were even talks in the market that Greece's problem is a 'dressed rehearsal' for US and UK, which also have huge budget deficits. MSCI World index dropped 2.2% to 1095.4 while DOW breached 10,000 level twice before closing at 10,012.23. Dollar managed to ride on risk aversion with dollar index closed above 80 level and the Japanese was also broadly higher across the board. Nevertheless, DOW's refusal to give away 10,000 level and late Friday's pullback in risk aversion argues that flight-to-safety fund flow has possibly peaked in near term and we might see the markets stabilize a bit in near term.

One point to note is that data released from CFTC on Friday showed that speculative accounts built a record net euro short position and flipped their net yen short position to a net yen long as per February 2. Speculators increased their euro short position to -43,741 contracts from last week's short of -39,539, which was in sharp contrast to record net euro long of +119,538 contracts seen May 15, 2007. Speculative accounts had a net yen long of +7,135 contracts, comparing to to the net yen short of -4,347 contracts seen last week and the December 1 position of +56,907 contracts, which was the largest net yen long of 2009.

Employment data released last week reminded the markets that global recovery is still fragile. US job market contracted -20k in January versus expectation of 20k expansion. December's figure was also revised down from -85k to -150k. Unemployment rate dropped from 10.0% to 9.7%, which was the best number in five months. However, that was largely due to a sharp increase in the number of people giving up looking for work as number of 'discouraged job seekers' rose to 1.1 million in January from 734,000 a year ago. New Zealand unemployment rate surged sharply from 6.5% to 7.3% in Q4. Nevertheless, Canadian employment data showed much better than expected expansion of 43k in January, the fourth gain in six months. Unemployment rate also dropped to 8.3%.

ECB kept its main refinancing rate unchanged at 1%. The introductory statement was very similar to the one released 3 weeks ago. The central bank believed current rates remain appropriate and risks to economic outlook are broadly balanced. Concerning gradual phase-out of extraordinary stimulus measures, the ECB said more details will be given in March. Concerning Greece's 3-year plan to reduce budget deficit, the President said it 'steps in the right direction' but 'they must fix the goals that they have set for themselves'.

BoE left rates unchanged at 0.50% and paused its GBP 200b asset purchase program as widely expected. The bank said in the accompanying statement that the current interest rate "would continue to impart a substantial monetary stimulus to the economy for some time to come." Meanwhile, the committee will "continue to monitor the appropriate scale of the asset purchase program and further purchases would be made should the outlook warrant them."

As a surprise to the market, the RBA announced to keep the overnight cash rate unchanged at 3.75%, following 3 consecutive hikes last year, as policymakers would like to gauge the impact of previous hikes and stimulus withdrawal. RBA noted that lenders in Australia has "generally raised rates a little more than the cash rate over recent months" and "loan rates have risen by close to a percentage point." The bank would seek to hold the cash rate steady for the moment to see the impact of these changes to the economy. Nevertheless, the bank maintained a tightening bias that "if economic conditions evolve broadly as expected, the Board considers it likely that monetary policy will, over time, need to be adjusted further in order to ensure that inflation remains consistent with the target over the medium term."

Looking at the charts, DOW's recover was limited by 55 days' EMA and fall from 10729.89 resumed. 10,000 psychological level is so far still stubbornly held but we'll expect it to be taken out decisively eventually. Whole medium term rebound from 6469.9 has completed at 10792.8 and we expect a correction to 38.2% retracement at 9102 at least.

VIX, the fear index, also made another high at 29.22 before settling at 26.11. It showed that investors' anxiety continue to build up which supports the view of more correction in stock markets.

Crude oil's decline resumed last week and the break of trend line support argues that whole medium term rise from 33.2 has completed at 83.93 already. Short term weakness to 68.59 support next and break there will confirm medium term reversal for key cluster support at 58.32 (50% retracement of 33.2 to 83.95 at 58.58) next.

While some consolidations might be seen initially this week, we'd expect risk aversion to come back sooner or later which bring another round of selloff in stocks and commodities. This should give dollar and yen another boost later in the month. Dollar index rose sharply to as high as 80.68 last week before closing at 80.26. Mentioned target of 38.2% retracement of 89.62 to 74.19 at 80.08 was already met. As noted before, our favored view is that consolidation from 88.46 has completed with three waves down to 74.19. Rise from 74.19 is possibly resuming the long term up trend from 70.70. Decisive break of 100% projection of 74.19 to 78.45 from 7.60 at 80.86 will suggest that such rise is developing into an impulsive move and will further affirm this case. In any case, we'll stay bullish in dollar index as long as 78.68 support holds.

Meanwhile, we'd also continue to favor yen a bit more than dollar. Developments in EUR/JPY and GBP/JPY are clearly supporting the more decline towards important lows of 112.10 and 118.81 made in 2009. USD/JPY's fall from 93.74 resumed last week and should be in progress towards 87.36 support next. AUD/JPY also displayed clear weakness last week by falling sharply to as low as 76.19. The break of 76.54 support indicates that whole medium term rebound from 55.11 has made a top at 86.71 on bearish divergence condition in daily MACD and RSI. We'd expect further decline towards 70.74 cluster support next (50% retracement of 55.11 to 86.17 at 70.64). Break of 80.68 is needed to be first sign of bottoming or outlook will remain bearish.

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INDIAN STOCK MARKET THE WEEK THAT ENDED

The key benchmark indices tripped as as Europe's sovereign debt, indications of weak US jobs data and a crash in commodity and energy prices raised fresh concerns over global economic recovery. The Sensex fell in 4 out of 5 trading sessions in the week ended Friday, 5 February 2010. The BSE Sensex fell below the psychological 16,000 mark.

Fiscal woes in Europe pushed global equities sharply lower on Friday 5 February 2010, as the cost of insuring Greece, Spain and Portugal's debt against default rose sharply. European Commission's endorsement Wednesday of Greece's deficit-cutting plan failed to assuage investor fears.

The BSE Sensex declined 567.03 points or 3.47% to 15,790.73 in the week ended 5 February 2010. The S&P CNX Nifty fell 163,40 points or 3.34% to 4718.65.

The BSE BSE Mid-Cap index fell 2.5% and the BSE Small-Cap index fell 1.93%. Both the indices outperformed the Sensex.

Chairman of the prime minister's economic advisory council C. Rangarajan on Friday said the government is no hurry to roll back economic stimulus measures in one go. He also said that efforts will be made in the budget later this month to lower the fiscal deficit. It has been pointed out repeatedly that the process of exit must be gradual, coordinated and must not be sudden, should not disrupt the economy and efforts will be made to bring down the fiscal deficit in the coming budget, Rangarajan said.

Following rising prices of potato and pulses, food inflation rose to 17.56% in the week ended 23 January 2010 from 17.40% in the previous week, government data released on Thursday showed. The inflation for primary articles, which include food and non-food items, marginally eased to 14.56% in the reporting week from 14.66% in the previous week. The fuel price index rose 5.88%

Pronab Sen, the country's chief statistician, said on Wednesday the government should wait till May to roll back stimulus, as the strength of the demand recovery visible in available data may not be for real, pulling the finance minister, Pranab Mukherjee, away from a policy direction which the Reserve Bank of India (RBI) desires.

Reserve Bank of India (RBI) governor D Subbarao has for the first time, said the nation may have to take some measures towards capital control in the short term to avoid stark economic imbalances after acknowledging in the past the role played by fund flows in worsening inflation, boosting asset prices and destroying industry competitiveness.

The RBI will target inflation in the coming months, Subbarao said on Monday. Subbarao also said it is important for the government to withdraw the stimulus and that the government and central bank would have to coordinate in withdrawing stimulus. He reiterated that the economy is back to growth and added that the challenge is to accelerate momentum.

The Reserve Bank of India (RBI) will adjust monetary policy outside of its quarterly review cycle only under extraordinary circumstances, a deputy governor Subir Gokarn said on Monday.

Meanwhile, the business activity among Indian services companies expanded at its fastest pace in 16 months in January 2010, rising for a second straight month on sharp increase in new work orders, a survey showed. The HSBC Markit Business Activity Index, based on a survey of 400 Indian firms, rose to 58.96 in January 2010, its highest since September 2008, after rising to 57.41 in December 2009.

Earlier this month, another data showed that manufacturing activity grew at its fastest pace in almost 1-1/2 years in January 2010, driven by a sharp rise in new export orders that are supporting a recovery in the industrial sector. The HSBC Markit Purchasing Managers' Index (PMI), based on a survey of 500 Indian companies, rose to 57.7 in January 2010, its strongest reading since August 2008 and up from 55.6 in December 2009.

Exports continued to rebound, rising an annual 9.3% in December to $14.6 billion, their second consecutive monthly rise, although the pace of annual growth was slower than the 18.2% registered in November. Imports increased by 27.2% in December from a year earlier to $24.75 billion while the trade deficit shrunk by a little over 28 percent to $76.24 billion for the April- December 2009 period.

India can gradually start raising interest rates as Asia's third-largest economy is among the first to recover after the global financial crisis, the International Monetary Fund (IMF) said in a report published on 4 February 2010 on its website. India's economy is one of the first in the world to recover and the central bank should take a gradual approach to ensure the recovery reaches its full potential, the IMF report said.

The International Monetary Fund sees the Indian economy coming back to potential by 2010-11 to log 8% growth from the current year's 6.75 per cent. Still, the IMF's assessment of GDP growth for the current fiscal is in contrast to the government's projection of more than 7% and the RBI's latest forecast of 7.5%

The two top stock exchanges, the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE) have decided to hold a special trading session on Saturday, 6 February 2010, as NSE is testing an upgraded trading system. Trading will begin at 11:00 IST and end at 12:30 IST.

The advance estimates on economic growth for the current fiscal ending March 2010 will be released on Monday. It will be based on the provisional data for the first half of the year and partial data for third quarter and no data on the fourth quarter, which contributes the highest to the annual Gross Domestic Product.

As regards government's divestment plan, Rural Electrification Corporation (REC) will be the next Government- owned entity to come out with a follow-on public offer (FPO). Its 17.1-crore share FPO will open on 19 February 2010 and will close on 23 February 2010. This will be followed by NMDC's FPO.

As per reports, in the next fiscal, the Government is likely to divest its stake in state-run firms such as Engineers India, Coal India through initial public offers (IPOs) and Power Grid and Sail through FPOs.

Emerging market equity funds lost $1.6 billion in weekly withdrawals, the biggest outflows in 24 weeks, as earnings and Greece's debt woes raised concerns that the global recovery may falter, the EPFR Global data indicated. Investors withdrew $516 million from Asian equities outside of Japan in the week ended 3 February 2010. Within Asia, China equity funds reported net outflows for the fifth time in six weeks while Indian funds lost $180 million, the most in 68 weeks

The key benchmark indices witnessed a divergent trend, with BSE Sensex closing flat and S&P CNX Nifty eking out small gains on Monday, 1 February 2010 after a strong intraday rebound triggered by upbeat economic data and higher monthly sales figures from two auto majors Maruti Suzuki and Mahindra & Mahindra. The BSE 30-share Sensex was down 1.93 points or 0.01% to 16,356.03 on that day.

Key benchmark indices declined reversing early gains on Tuesday, 2 January 2010 as investors turned cautious ahead of the opening of the large follow-on public offer (FPO) of state-run power generation firm NTPC on Wednesday, 3 February 2010. The BSE 30-share Sensex fell 192.59 points or 1.87% to 16,163.44 on Tuesday.

The key benchmark indices surged on Wednesday, 3 January 2010 on robust services sector data for January 2010 and firm global stocks boosted investor sentiment. The BSE 30-share Sensex rose 332.61 points or 2.06% to 16496.05 on that day.

Weak global cues casted their shadow on the domestic bourses on Thursday, 4 January 2010 which ended sharply lower following a late sell-off in index pivotals. The BSE 30-share Sensex was down 271.10 points or 1.64% to 16,224.95 on that day.

Sustained selling pressure kept key benchmark indices suppressed throughout the day on Friday, 5 February 2010. World stocks fell as Europe's sovereign debt, indications of weak US jobs data and a crash in commodity and energy prices raised fresh concerns over global economic recovery. The BSE Sensex fell 431.58 points or 2.66% to 15,793.37 on that day.

Metal stocks declined on weak metal prices on London Metal Exchange. Hindalco Industries (down 6.21%), Tata Steel (down 3.26%), Sterlite Industries (down 2.13%), National Aluminium Company (down 4.8%) and Hindustan Zinc (down 7.52%), edged lower.

Index heavyweight Reliance Industries (RIL) fell 6.23%. As per reports RIL has submitted a $2 billion expression of interest for Value Creation Inc, a Canada-based private firm which holds oil sands assets.

India's largest power utility firm by sales NTPC fell 4.64%. NTPC's follow-on pubic offering (FPO) was fully bid on the last day of the issue on 5 February 2010. The FPO was subscribed 1.19 times. The FPO which opened for bidding on 3 February 2010 closed on Friday, 5 February 2010.

NTPC's FPO is the first public issue which is adopting the French Auction route to raise funds. Under the French Auction model, institutional buyers are free to bid above a certain floor price. The highest bidder gets preference during the allotment of shares

The government currently holds an 89.5% stake in NTPC and it plans to dilute 5% through the FPO. At the floor price, the government would mop up Rs 8286 crore

Rate sensitive realty shares dropped on fears a hike in interest rate following inflationary pressures in the domestic economy may crimp housing demand. DLF (down 7.02%), Indiabulls Real Estate (down 7.28%) and Unitech (down 7.19 %) edged lower.

IT pivotals declined following poor US economic data. US is a key market for Indian IT firms. India's second largest IT exporter by sales Infosys slipped 5.03%

India's third largest software services exporter Wipro declined 1%. As per recent reports, Wipro Consumer Care and Lighting, the FMCG arm of Wipro, is in advanced talks to buy Nigeria-based skincare company, Tura International.

India's largest IT exporter by sales Tata Consultancy Services fell 1.28%. Reportedly TCS' Passport Seva Project, which aims to issue passports in flat three days, is all set to be launched in a week or two.

The National Association of Software and Service Companies (Nasscom) has projected export revenue to grow 13% to 15% to $56-$57 billion in the year to March 2011, below the previous outlook for $60-$62 billion.

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FOREX DAILY REVIEW

EUR/CHF
Daily Pivots: (S1) 1.4703; (P) 1.4728; (R1) 1.4745;
Break of 1.4701 support suggests that recovery from 1.4635 is already completed. Intraday bias is flipped back to the downside. Break of 1.4635 will bring decline resumption towards next key support level at 1.4577. On the upside, above 1.4579 will bring another round of rebound to 1.4808 resistance and above. Nevertheless, we'd still expect strong resistance near to 1.5007 support turned resistance and bring fall resumption.

In the bigger picture, with EUR/CHF still staying well below 55 weeks EMA, fall from 1.5880 is likely still in progress. Current decline should have a test on 1.4577 support first and break will target 2008 low of 1.4315. On the upside, break of 1.5007 support turned resistance is needed be the first signal to indicate that fall from 1.5446 has finished. Otherwise, medium term outlook will remain bearish.

USD/CAD
Daily Pivots: (S1) 1.0542; (P) 1.0591; (R1) 1.0618;
USD/CAD's break of 1.0638 minor resistance indicates that pull back from 1.0720 has likely completed at 1.0544 already. Intraday bias is flipped back to the upside. Break of 1.0720 will bring rally resumption to 1.0744 resistance first. As discussed before, break there will confirm that whole correction pattern from 1.0851 has already finished at 1.0223 and will bring stronger rally to retest this resistance next. On the downside, in case of another fall, we'd continue to expect strong support from 38.2% retracement of 1.0223 to 1.0720 at 1.0530 and bring rebound.

In the bigger picture, we're still favoring the case that whole medium term fall from 1.3063, which is viewed as a correction to long term rise from 0.9056, has completed at 1.0205 already. Break of 1.0851 will confirm this case by completing a double bottom reversal pattern (1.0205, 1.0223). In such case stronger rally should be seen to 61.8% retracement of 1.3063 to 1.0205 at 1.1971 at least. Also, in such case, we'll tentatively treat rise from 1.0205 as resumption of the whole up trend from 2007 low of 0.9056 and focus on the structure of the rise from 1.0205 for confirmation.

EUR/USD
Daily Pivots: (S1) 1.3845; (P) 1.3935; (R1) 1.3984;
EUR/USD's decline is still in progress and intraday bias remains on the downside for key cluster support at 1.3737 next. On the upside, while some recovery might be seen, break of 1.4025 resistance is needed to indicate that EUR/USD has made a bottom. Otherwise, short term outlook will remain bearish.

In the bigger picture, medium term rise from 1.2456 has completed at 1.5143 on bearish divergence conditions in daily MACD. Focus now turns to 1.3737 cluster support (50% retracement of 1.2329 to 1.5143 at 1.3736). Decisive break there will also confirm the case that three wave consolidation from 1.2329 has finished at 1.5134 too. In other words, whole medium term term fall from 1.6039 should be resuming for a new low below 1.2329. On the upside, however, break of 1.4578 resistance will leave the fall from 1.5143 in three wave corrective structure and mixes up the outlook.

USD/CHF
Daily Pivots: (S1) 1.0527; (P) 1.0564; (R1) 1.0630;
Intraday bias in USD/CHF remains neutral for the moment and consolidation from 1.0640 might extend further. Another fall cannot be ruled out but downside is expected to be contained by 1.0367 support and bring rally resumption. Above 1.0640 should target 100% projection of 0.9916 to 1.0506 from 1.0131 at 1.0721 next.

In the bigger picture, medium term fall from 1.1963 has completed with five waves down to 0.9916 already, on bullish convergence condition in daily MACD. Also, the three wave consolidation from 1.2296 should be finished too. Current rise from 0.9916 is expected to extend further to medium term trend line resistance first (now at 1.0963). Sustained trading above the trend line will affirm the case that long term rise from 2008 low of 0.9634 is resuming for another high above 1.2296. On the downside however, a break of 1.0131 support will invalidate this bullish view and argue that medium term down trend in USD/CHF is still in progress for another low below 0.9916.

USD/JPY
Daily Pivots: (S1) 90.28; (P) 90.77; (R1) 91.48;
No change in USD/JPY's outlook. Choppy recovery from 89.13 might extend further but still, fall from 93.74 is expected to continue as long as 91.86 resistance holds. Below 90.07 minor support will flip intraday bias back to the downside. Break of 89.13 will confirm fall resumption to 87.36 support next. As discussed before, break of 87.36 will also confirm the bearish case that whole rise from 84.10 has completed with three waves up to 93.74 already and that medium term down trend is resuming for another low below 84.81. However break of 91.86 will invalidate the bearish view and suggest that rise from 84.81 is still in progress for another high above 93.74.

In the bigger picture, USD/JPY is still trading below medium term trend line resistance at 94.18 and 55 weeks EMA at 93.79 Whole down trend from 124.13 is likely still in progress and a break of 84.81 will target 1995 low of 79.75. However, note bullish convergence condition is seen in weekly MACD. Sustained trading above the medium trend line resistance will be the first signal of medium term reversal and in such case, focus will turn to 101.43 resistance for confirmation.


GBP/USD
Daily Pivots: (S1) 1.5819; (P) 1.5944; (R1) 1.6012;
GBP/USD's break of 1.5829 support confirms that whole decline from 1.6875 has resumed. Intraday bias remains on the downside for the moment and further fall should be seen to 1.5706 key cluster support. on the upside, above 1.5918 minor resistance will turn intraday bias neutral and bring some recovery. But another fall is still expected as long as 1.6067 resistance holds.

In the bigger picture, we're still favoring the bearish case that medium term rebound from 1.3503, which is treated as a correction to down trend from 2.1161, has completed at 1.7043. Firm break of 1.5706 cluster support (38.2% retracement of 1.3503 to 1.7043 at 1.5691) will confirm this case and indicate that whole down trend from 2.1161 is likely resuming for a new low below 1.3503. However, note that break of 1.6456 resistance will in turn shift favor to the case that recent price actions from 1.7043 are merely developing into consolidations to the larger rise from 1.3503. That is, whole medium term rise from 1.3503 might not be finished yet and another rise could still be seen to 1.7332/8236 (50% and 61.8% retracement of 2.1161 to 1.3503) before completion.

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METALS AND CRUDE FORECAST

Investors dump risky assets amid renewed concerns about sovereign default risks in European countries. In Greece, although the government's plan to reduce deficit received support from the European Commission, it is opposed by local unions, indicating difficulties in implementation of the measures.

There are signs that the worries have been spread to other European countries. Stocks and bonds in Spain, Portugal and Hungary plummet amid worries that the governments may not be able to fund the heavy debts.

The euro dives to 1.3849 against USD, a level not seen since July 2009. High-yield currencies, such as AUD and NZD, also plunge after releases of disappointing economic data.

Commodities weaken as the dollar strengthens. The benchmark contract for gold slides -0.8% to 1103 in European session, following a -0.5% dip on the previous day. In our opinion, gold should benefit in the long-run of sovereign risk concerns persist. In fact, other than these small European countries, the US and the UK are also bearing heavy budget deficits. Investors should later realize that USD is not a safe haven as the US is seeking to expand stimulus measures which will result in a bloated budget deficit of $1.6 trillion this year.

Released Tuesday, the weekly financial statement of the Eurosystem indicated one of the Eurosystem central banks purchased gold, contributing to 1M euro increase in gold and gold receivables reserve. At the same time, sales of gold were minimal (below 2 metric tons) since the start of the 3rd CBGA on September 27, indicating official demand for gold remains stable.

We continue to see capitals flowing into US PGM ETFs. As of February 2, physical holdings of platinum surged to 244.9K oz, up +14% from the prior week. Correspondingly palladium holdings were flat at 399.9K oz, possibly a pause after a 40 times increase since the launch of the ETF.

Investment in ETF helps tightening supply of the metals as it's physically backed. According to Johnson Matthey's estimates total platinum supply was 6055K oz while demand was 5915K oz in 2009. During the same period, platinum holdings in platinum ETFs was around 910K oz, around 15% of total supply and demand. For palladium, total supply and demand were 7175K oz and 6520K oz, respectively, in 2009. Total holdings in palladium of 1.3M oz represents 18% of supply and 20% demand last year.

Launch of PGM ETFs should not end here. Rather, it's just the beginning of a new wave of PGM ETFs. In Japan, Osaka Securities Exchange will list an ETF tracking platinum futures contract, together with an ETF tracking gold futures, in mid February.

Despite slump in 2009, autocatalyst remains a major source of demand for PGMs. Anticipated recovery in auto sector should help tighten the market further. US auto sales surged +12% yoy in January to 10.78M units. Although Toyota's recall crisis caused a plunge in its US sales to the lowest in 10 years, it should not have much impact on the overall outlook of auto market. China surpassed the US in terms of car sales and became the biggest auto market in 2009. Many auto giants expressed their interests in focusing on China, as well as other countries in Asia, this year. Industry experts forecast Chinese auto market will grow as much as 15% this year while Volkswagen, the largest car maker in Europe, announced plans to raise sales of cars, sport-utility vehicles and vans to 10M units in India and China this year.

Robust growth in auto sake also boosted fuel demand. In 2009, auto sales increased +46% yoy, triggering apparent demand for oil by +3.7%. According to China National Petroleum Corp (CNPC) apparent oil demand may rise more than +5% to 427M metric tons in 2010, in which gasoline demand will surge +7.8% to 72.2M metric tons and diesel consumption will grow +7.7% to 149.7M metric tons.

Energy prices continue to fall. WTI crude oil price slips to 76.2 (-1%), while both of heating oil and gasoline prices are down -0.7%.

GOLD
Gold's sharp fall today and break of 1100.5 minor support indicates that recovery from 1074.4 has completed at 1126.4 already. Intraday bias is flipped back to the downside for retesting 1074.4 low first. Break there will confirm decline resumption and should target 100% projection of 1163 to 1074.4 from 1126.4 at 1037.8 next. On the upside, even in case of recovery, break of 1126.4 resistance is needed to indicate that gold has bottomed out. Otherwise, outlook will now remain bearish.

In the bigger picture, gold has made a medium term top at 1227.5 and correction from there is likely still in progress to 100% projection of 1227.2 to 1075.2 from 1163 at 1010.7, which is close to 1000 psychological level. However, we'd expect such correction to be contained there at around 1000 psychological level and bring resumption of the whole up trend from 2008 low of 681. A break above 1163 will indicate that such correction has completed and will turn outlook bullish for another high above 1227.5.

SILVER
Silver's break of 16.015 support confirms that recent decline has resumed after recovery was limited by 4 hours 55 EMA. Intraday bias is flipped back to the downside and further fall should be seen to 61.8% retracement of 12.435 to 19.50 at 15.134 next On the upside, above 16.43 will turn intraday bias neutral again. But break of 16.95 is needed to indicate that Silver has bottomed. Otherwise, outlook will remain bearish.

In the bigger picture, current developments revived the case that silver has already topped out in medium term at 19.50. Decisive break of 16.19 projection target suggests that fall from 19.50 is developing into an impulsive move which further affirm the reversal scenario and bring deeper decline to lower medium term trend line at 14 level. Also, note that whole medium term rise from 8.4 is is treated as part of the long term, wide range, consolidation pattern that started at 21.44 back in Mar 08. Fall from 19.50 is possibly the third leg of such consolidation pattern and might target a new low below 8.5 after taking out 12.435 key support level. On the upside, above 18.925 resistance is now needed to invalidate this view. Otherwise, outlook will remain bearish.

CRUDE OIL
Crude oil's rebound stalled just ahead of 50% retracement of 83.95 to 72.43 at 78.19 and retreats sharply. Intraday bias is turned neutral with 4 hours MACD crossed below signal line. Break of 75.44 minor support will suggest that rebound from 72.43 has completed and will flip intraday bias back to the downside. for retesting this support first. Break will put medium term trend line support (at 71/72 level) back into focus. On the upside, above 78.19 will bring rally resumption to retest 83.95 instead.

In the bigger picture, crude oil managed to hold above medium term trend line support and rebounded strongly from 72.43. The development argues that medium term rise from 33.2 might not be over yet even though upside momentum is clearly diminishing. Another high above 83.95 might still be seen. Nevertheless, as rise from 33.2 is treated as a correction to down trend from 147.27, we'd continue to look of reversal signal as crude oil approaches 50% retracement of 147.27 to 33.2 at 90.24, which is close to 90 psychological level. On the downside, break of 72.43 will now be an important signal that crude oil has topped out and will turn focus to 68.59 support for confirmation.

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METALS AND CRUDE REVIEW

Commodities extend strength as USD weakens against the euro. Currently trading at 75.2, the benchmark contract for WTI crude has rebounded +3.8% from recent low of 72.43. While the market remains thrilled by strong ISM data, the industry-sponsored API's inventory estimates as well as the official report by the US Energy Department will determine whether energy prices can rise further.

Bloomberg forecast that the OPEC may have reduced output in January. While we prefer gathering more data points before reaching a conclusion, it's likely OPEC may want to control output so as to lift the preferred price range higher.

In December, OPEC produced 29.14 M bpd of crude oil while the 11 members bearing quotas produced 26.68M bpd. Compliance dropped to 58%. While the cartel stressed stricter compliance level is needed, Saudi Arabia's oil minister said that oil price at a range of 70-80 is perfect for the world. We believe OPEC's output will not have dramatic change in the near-term but should members work in unison to limit production, it can trigger a leap in oil price.

In the latest reports by the US Energy Department, the International Energy Agency and the OPEC, 'call on OPEC' averaged to 28.94M bpd. Therefore, if OPEC manages to scale back production to levels seen in the middles of 2009, we could see a tightening of oil market balance this year.

Gold rises further after Monday's close above 1110, the first time in 2 weeks. The chart below suggests that while the yellow metal has been trading with great volatility against the dollar, it's relatively firm when denominated in other currencies such as the euro and the franc. This suggests gold's underlying fundamental remains strong.

PGMs' rebound continues with platinum rising to 1561 and palladium to 439. Platinum-to-gold price has improved significantly since December 2009. The palladium-to-gold ratio shows similar pattern. We believe PGM's outperformance will continue this year as driven by tight fundamentals and robust ETF investments.

Gold

Gold's strong rebound and break of 1105.1 resistance indicates that a short term bottom is formed with bullish convergence condition in 4 hours MACD. Stronger recovery could now be seen to 38.2% retracement of 1227.5 to 1074.4 at 1132.9. Neverhteless, upside is expected to be limited below 1163 resistance and bring fall resumption. Below 1074.4 will target 100% projection of 1227.5 to 1075.2 from 1163 at 1010.7 next.

In the bigger picture, gold has made a medium term top at 1227.5 and correction from there is likely still in progress to 100% projection of 1227.2 to 1075.2 from 1163 at 1010.7, which is close to 1000 psychological level. However, we'd expect such correction to be contained there at around 1000 psychological level and bring resumption of the whole up trend from 2008 low of 681. A break above 1163 will indicate that such correction has completed and will turn outlook bullish for another high above 1227.5.

Silver

Current development suggests that silver has formed a short term bottom at 16.015 after touching 16.12 support. Intraday bias is mildly on the upside and stronger recovery could be seen to 38.2% retracement of 18.925 to 16.015 at 17.127 next. On the downside, though, below 16.015 will indicate that recent fall has resumed and should target 61.8% retracement of 12.435 to 19.50 at 15.134 next.

In the bigger picture, current developments revived the case that silver has already topped out in medium term at 19.50. Decisive break of 16.19 projection target will suggest that fall from 19.50 is developing into an impulsive move which further affirm the reversal scenario and bring deeper decline to lower medium term trend line at 14 level. Also, note that whole medium term rise from 8.4 is is treated as part of the long term, wide range, consolidation pattern that started at 21.44 back in Mar 08. Fall from 19.50 is possibly the third leg of such consolidation pattern and might target a new low below 8.5 after taking out 12.435 key support level. On the upside, above 18.925 resistance is now needed to invalidate this view. Otherwise, outlook will remain bearish.

Crude Oil

Break of 75.04 resistance argues that a short term bottom is formed at 72.43 on bullish convergence condition in 4 hours MACD. Intraday bias is flipped back to the upside and stronger rebound should be seen towards 38.2% retracement of 83.95 to 72.43 at 76.83 first. On the downside, though, a break below 72.43 will indicate that fall from 83.95 has resumed for 68.59 key support.

In the bigger picture, the case of medium term reversal continued to build up with fall from 83.95 extended. As noted before, whole medium term rise from 33.2 is viewed as a correction to fall from 147.27 only. Break of trend line support (now at 71/72) level will be the first signal that such rise has completed. Further break of 68.59 will support will confirm this bearish case and will target a retest on 33.2 low as correction down trend from 147.27 resumes. On the upside, though, in case of another rise, crude oil we'd continue to look of reversal signal as crude oil approaches 50% retracement of 147.27 to 33.2 at 90.24, which is close to 90 psychological level.

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FOREX MID-DAY REPORT

Dollar continues to consolidate as global stocks recover. Sterling was lifted by better than construction PMI while Euro is lifted by stronger than expected PPI reading. Nevertheless, the retreat in dollar is so far mild. More apparent strength is seen in Canadian dollar which is supported by crude oil's rebound to above 75 level. Aussie was sold off earlier today as RBA unexpected left rates unchanged and remains soft in early US session.

As a surprise to the market, the RBA announced to keep the overnight cash rate unchanged at 3.75%, following 3 consecutive raises last year, as policymakers would like to gauge the impact of previous hikes and stimulus withdrawal. (more in RBA Warrants Doing Less as China is Doing More). Aussie was sold off sharply across the board after the announcement. AUD/CAD is indeed the biggest loser today as the CAD is lifted by rebound in crude oil. The cross's trend seems to have changed since last Q4 and could have already topped out at 0.9912. Today's sharp fall argue that the near term down trend is resuming for 0.9197 and below. We'd expect Aussie to underperform the loonie in near term.


On the data front, Japan monetary base rose 4.9% yoy in January. Australia NAB business confidence dropped to 8 in December. Swiss SECO consumer confidence improved more than expected to -7 in January. German retail sales rose less than expected by 0.8% mom in December. GBP PMI construction improved more than expected to 48.6 in January even though it's still staying in contraction region below 50. Eurozone PMI rose 0.1% mom in December, dropped -2.9% yoy.

USD/JPY Mid-Day Outlook
Daily Pivots: (S1) 90.01; (P) 90.48; (R1) 91.07; More.

Outlook in USD/JPY remains unchanged. While further recovery cannot be ruled out, fall from 93.74 is still in favor to continue as long as 91.86 resistance holds. Below 89.97 will flip intraday bias back to the downside. Break of 89.13 will confirm fall resumption to 87.36 support next. As discussed before, break of 87.36 will also confirm the bearish case that whole rise from 84.10 has completed with three waves up to 93.74 already and that medium term down trend is resuming for another low below 84.81. However break of 91.86 will invalidate the bearish view and suggest that rise from 84.81 is still in progress for another high above 93.74.

In the bigger picture, USD/JPY is still trading below medium term trend line resistance at 94.18 and 55 weeks EMA at 93.79 Whole down trend from 124.13 is likely still in progress and a break of 84.81 will target 1995 low of 79.75. However, note bullish convergence condition is seen in weekly MACD. Sustained trading above the medium trend line resistance will be the first signal of medium term reversal and in such case, focus will turn to 101.43 resistance for confirmation.

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