The euro tumbled as sovereign debt worries in peripheral countries resurfaced. Yield spreads between Portuguese bonds and German bunds widened significantly despite government's pledge of meeting deficit targets for 2010 and 2011. Gold was weighed down as the single currency slumped and USD strengthened. The benchmark Comex contract fell initially to 1364.3 before finishing the day at 1371.7, down -0.15%. Crude oil price slumped amid USD's rise and the broadly based correction in financial markets. The front-month WTI contract fell to 87.85, the lowest level in almost 3 weeks, before closing at 88.38, down -2.13%. Yield spread between 10-year Portuguese bonds and corresponding German bunds surged +319 bps to 4.146%, the highest level since November 30 2010, at close. Although the government said it would reach deficit targets of 7.3% of GDP in 2010 and 4.6% of GDP in 2011, investors doubted. The latest 6-month bill drew a yield of 3.686%, compared with 2.045% when the bill was auction in September. This signaled significant increase in Portugal's borrowing costs and raised worries about the country's bond issuance next week. (Portugal plans to issue 0.75-1.25B euro of bonds due October 2010 and January 2020 on January 12). Contagion was evident on widening in Spanish, Greece and Italian yield spreads. Gold weakened as the euro dropped amid resurgence of sovereign debt concerns. We noticed both the metal and the single currency declined after the European Commission proposed a plan that bondholders will need to share the losses if the banks/institutions they lend to go bust. The new rule, if passed, allows regulators to step in and impose losses on creditors to prevent a bank from collapsing. Indeed, gold's movement during EU crisis is not one-way. It surged to record highs last year as escalation in debt problems increased safe-haven demand for gold. However, it sometimes declined in tandem with the euro, demonstrating the inverse relationship with USD. Initial jobless claims in the US increased +18K to 409K in the week ended January 1. While the reading exceeded consensus of 404K, the 4-week moving average fell -3K to 411K and continuous claims dropped -47K in the week ended December 25. Investors took this report as a positive sign for US' employment outlook. Non-farm payrolls probably added +140K in December, following an increase of +15.2K in the prior month. Unemployment rate is expected to have slipped slightly to 9.7%. USD strengthened further after the report as encouraging employment outlook spurred speculations for limited QE by the Fed in the future.

Source