Written by Sumit Roy  |

August 08, 2011

Morning Call: Gold Surges To Record ($1716), Oil Plunges on S&P Downgrade

Details

S&P's downgrade of its U.S. credit rating is leading to selling in most markets, but ironically, U.S. Treasuries are rallying sharply.  Gold hit a new record.

IN TODAY'S HEADLINES ...

• Financial markets — including commodities — are plunging this morning on the back of news that S&P has downgraded its U.S. sovereign credit rating from AAA to AA+. But though stocks and commodities are set to open the session strongly to the downside, U.S. Treasuries are actually rising. The 10-year note yield was last down 10 basis points to 2.46 percent thanks to safe haven flows. Indeed, the S&P move seems more symbolic than anything and will likely not have any meaningful impact on the U.S. Treasury market — which is still seen as perhaps the safest asset in the world by many. Incidentally, Japan is rated two notches below the U.S. at AA-, but the country's 10-year bonds yield a mere 1 percent.
  
  Meanwhile, the G-7 said over the weekend that it would take "all necessary initiatives in a coordinated way" to ensure stability in financial markets. In fact, that action has already begun as evidenced by the European Central Bank's latest purchases in its Securities Market Program. The ECB has bought Italian and Spanish bonds, according to sources. Yield spreads on those bonds over benchmark German 10-years fell by a whopping 67 basis points and 78 basis points to 3.07 percent and 2.91 percent on the news. The key will be to see whether yields stay down in the coming weeks and months.
  Italian, Spanish Bonds Rally on ECB Buying; German Bunds Fall
  
  
• Gold surged to a record $1715.75/oz thanks to S&P's downgrade of the U.S. sovereign credit rating. Silver also surged as high as $40.39, up 5.3 percent, but the metal has not been making progress like gold has in recent sessions. All eyes will be on Tuesday's Federal Reserve monetary policy decision and statement to see whether the U.S. central bank is ready to provide more stimulus to the economy.
  Gold Tops $1,700 for First Time on U.S. Rating  
  
  
• Crude oil is down significantly this morning amid economic concerns. Both WTI and Brent were last down over $3 to $83.50/bbl and $106, respectively. WTI is now at the lowest level since February, while Brent is at the lowest since late-June. Crude will likely take its cues from movement in stock markets as both are being influenced by the same macroeconomic worries at the moment.
  Crude Tumbles to Almost Eight-Month Low After S&P Downgrades U.S. Rating
  
  
• Grains are falling due to the broader sell-off in commodities, but losses are less severe. Corn was last trading down 1.88 percent to $6.80/bushel; soybeans fell 1.09 percent to $13.17; while wheat shed 2.87 percent to $6.60.
  Asia Grain Outlook: Lower Prices May Boost Physical Buying
  
  
• Copper was at the lowest level in five-months on the London Metal Exchange Monday, with prices falling as low as $8950/mt. "I fancy copper and other base metals to weaken over the next month, but don't see a repeat of the H2 2008 collapse," said analyst David Thurtell of Citi. "The copper market is in deficit, and we can expect the Chinese to restock on bouts of price weakness. But the '$11-12K by end 2011' call by other houses is looking increasingly doubtful in the current environment."
  Copper hits 5-week low on slowdown prospects

What to Watch For:

4:00 p.m. EDT: USDA Crop Progress Report