China gave us a Christmas surprise by hiking its 1-year lending and deposit rates, each by +25 bps, to 5.81% and 2.5% respectively on December 25. This was the second interest-rate increase since October and indicated the Chinese government's commitment to fight against inflation. Oil prices fell yesterday as China's tightening may curb demand from the world's biggest consumer. WTI crude oil for February delivery slipped -0.56% to settle at 91 yesterday. The contract initially soared to a new 26-month high of 91.88 earlier in the day. Benchmark contracts for heating oil and gasoline fell -0.89 and -0.95% respectively. Gold dropped to1372.7 earlier in the day but price was then supported by weakness in the US dollar. The benchmark Comex contract finished the day at 1382.9, up +0.17%. Price moved above 1390 in Asian session today.
While the market had expected a rate hike by the end of the year, the move was later than anticipated. Indeed, the People's Bank of China was thought to lift interest rates over the weekend after the November CPI report. However, the central bank only increased the reserve requirement ratio at that time. In our opinion, the decision to adjust interest rates before 2010 ends showed the government's determination to curb inflation and paved the way for more tightening in 2011. More rate hikes, as well as increases in RRR, will be seen next year as the current monetary setting should not be sufficient to effectively contain inflation.
In the near-term, commodities, particularly energies and base metals, will be hurt as demand may be reduced as the tightening curb investments. In the longer-term, the benefit of the soft-landing is healthier and more sustainable economic growth in China. This should help boost demand for these commodities.
Commitments of Traders:
Speculators had mixed views towards the energy market in the week ended December 21. Net length for crude oil futures fell -2 371 to 160 414 contracts while that for heating oil futures and gasoline futures rose +2 013 and +1 528 to 36 284 contracts and 73 820 contracts respectively. Net short for natural gas futures surged +19 044 to 202 096 contracts, the highest level since May, during the week.
In the precious metal complex, net length for gold futures declined for a second week, by -13 771, to 206 424 contracts as gold price remained in consolidation. Net length for silver futures, however, climbed modestly after falling over the past 2 weeks. Speculators were also mixed in PGMs outlooks. While net length for platinum futures increased +660 to 23 294 contracts, that for palladium futures slid -98 to 14 432 contracts.
