The financial markets made dramatic changes on Friday as protests in Egypt escalated. Equities plunged while safe-haven assets including the US dollar, bonds and gold jumped amid risk aversion. Oil prices also rebounded strongly as investors worried that protests will spread to the Middle East, affecting oil shipment from the OPEC. With the exception of agricultural products, commodities generally traded choppily for most of the week. While the Fed pledged its accommodative monetary stance and macroeconomic data continued to show improvements, potential tightening in emerging countries, especially China and India, raised worries about the demand outlooks.

The unrest in Egypt follows an uprising in Tunisia 2 weeks ago. The chaos in Tunisia was driven by people's anger over rise in food prices, high unemployment rate and corruption. These problems have also been shared by people in Egypt. Protests happening in Cairo, Alexandria, Suez and many other cities in the country have caused casualty and President Hosni Mubarak to appoint a new government. Egypt is the most populous Arab state and the market worries protests in Egypt, if spread to other Arab countries, will have huge impacts to the world.

China and India are the 2 biggest commodity demand drivers. Inflationary pressures have triggered the needs of monetary tightening. India's central bank raised the benchmark interest rate to 5.5%, the highest level in 2 years on January 25. While China has remained silent since the beginning of the year, the market focuses what will happen during and after Chinese New Year. Meanwhile, the State Council has announced measures to curb property price hikes last week, showing the government's commitment to prickle asset bubbles.

After Fed's pledge to leave interest rates at exceptionally low levels for an extended period of time. The ECB will be meeting for monetary decisions next week. We expect policymakers to level the main refinancing rate unchanged at 1%. Comments from President Trichet and other ECB members about inflation spurred rate hike speculations and boosted the euro last week.

Crude Oil

The widening in WTI-Brent spread was eye-catching last week. While Brent crude oil price continued to hover around 100, WTI crude weakened below 90 and decoupled from other international and regional benchmarks. WTI's discount to Brent rose to 11.75, a level not seen since January 2009. Brent prices have gained support from seasonal maintenance in Southern Europe while WTI was pressured by huge stock-builds. Total crude oil and petroleum products stocks rose for a 3rd consecutive week, by +2.40 mmb to 1069.4 mmb in the week ended January 21, according to the US DOE/EIA. Crude oil inventory jumped +4.84 mmb to 340.6 mmb. This was the second consecutive weekly increase in crude inventory. Increases in stockpiles were seen in all PAD districts except for the West Coast. Gulf Coast continued to see huge stock builds (up +5.90 mmb) during the week. Utilization rate dropped -1.2% to 81.8%, the lowest level since late October last year.

The EIA said in the January Short-term Energy Report preliminary data indicate that total consumption of petroleum and non-petroleum liquid fuels increased by +350K bpd, or +1.9%, in 2010 as driven by consumption growth in distillate fuel oil motor gasoline. Projected total US liquid fuels consumption growth in 2011 and 2012 are +160K bpd (+0.8%) and +170K bpd (+0.9%) respectively, with most of the growth contributing from motor gasoline and distillate fuel. Note that these forecasts were based on the assumption that the US economy will grow by +2.2% in 2011, compared with IMF's estimate of +3.0% and consensus of +3.2%. If the IMF or the consensus is correct, oil consumption will be much higher than EIA's estimates.

Natural Gas

Gas price tumbled last week. After receiving less-than-expected draw in weekly inventory, the EIA reported higher gas production in November. On Thursday, the EIA reported a -174 bcf draw in gas inventory but later resubmitted a +10 bcf revision. Therefore, gas storage should have dropped -164 bcf to 2552 bcf in the week ended January 21. Gas price initially climbed higher but then plummeted after the revised data was digested. Indeed, a -164 bcf drop was below consensus of a -168 bcf fall. On Friday, the Department said lower 48 states production increased +0.71 bcf/day, or +1.1%, to 66.52 bcf/day in November as driven by large gains in Louisiana, Texas, and Other States. The gains were partly offset production drop from the Federal Offshore Gulf of Mexico. Meanwhile, gross gas production climbed to76.05 bcf/day from a revised 75.25 bcf/day in October. Gross gas production sums lower 48 states and Alaska.

Separately, the number of gas rigs increased for the second straight week, by +7 units, to 913 units in the week ended January 28.

Precious Metals

While the +1.7% rebound on Friday had pared gold's decline, the metal's near-term outlook remains worrisome. Investment demands have been easing as macroeconomic environment improve. There were sizeable redemptions of shares in the largest gold ETF and declines in net length in Comex futures last week. Holdings in SPDR Gold Trust contracted -1.53M oz, to -3.75%, to 39.36M oz last week. This was the biggest 1-week drop since September 12 2008. Open interest in Comex gold futures plummeted to 491 222 contracts as of January 26, 2011. Open interest reached a record high of 650 764 contracts on November 9, 2010.

Gold price has dropped almost -6% over the past 4 week, setting the beginning of 2011 with a weak tone. As gold's correction has been heavier than previously expected, there have been talks about structural change gold's uptrend. As global economic outlook turns more encouraging and confidence improves in US and European markets, speculations about less QE loomed. Meanwhile, as the market gets better, investors seek higher risks and high yields. These resulted in declines in gold ETF holdings in recent weeks.

Despite near-term bearishness, we are still optimistic on the metal's longer-term outlook. Deficits remain a major problem in advanced economies. Fiscal tightening to reduce debts will dampen growth and therefore, accommodative monetary policy will stay long to stimulate the economy. Gold should resume its uptrend later in the year as demands for safe-haven, inflation-hedge and store of value return.