Crude oil price rebounded to +1.5% to 72.49 Thursday, in concert with rise in stock markets. Moreover, decline in USD also drove interest in commodity markets. RBOB gasoline and heating oil also gained +2.5% and +0.4% respectively. However, natural gas ended the day -2.3% lower at 2.84 as gas supplies more than expected.

Dow Jones Industrial Average slid in early NY session but then rose as pullbacks in bonds and dollar spurred market interest in risky assets. The benchmark index gained +0.4% to settle at 9581 yesterday with financial stocks such as AIA and Citigroup soaring +10% and +9% respectively. S&P Stock Average also added +0.3% to 1031.

Stocks in Asia extend gains in the US market with the MSCI Asia Pacific Index climbing +0.4%. In Japan, Nikkei 225 Stock Average has little change although unemployment rate rose to 5.7% in July, higher than consensus of 5.5% and 5.4% in the prior month. Japan remained in deflation in July with the nationwide CPI sliding to -2.2% during the month from -1.8% a month ago.

Natural gas storage rose +54 bcf, more than market expectation of +52 bcf to 3258 bcf in the week ended August 21. The September contract, expired yesterday, plunged -2.3% while the most-actively traded October contract lost -2.7%.

The precious metal complex's reaction to decline in USD was mild but mixed. While gold price gained +0.2% to 947.3, silver slipped -0.2% to 14.22. For PGMs, platinum rose +0.2% to 1240.5 but palladium lost -0.15 to 286.75.

Apparently, it seems that the market is generally convinced with the notion of the end of recession and global economic recovery, the breakdown of relationship between stock and bond markets suggested this may not be the case. Although we have often seen strong macro-economic data released, many of them still pointed to the downside. This probably resulted in divergent views in economic outlook.

Michael Mackenzie pointed out in an article in Financial Times that the current situation of rising stocks and commodity prices, together with falling bond yields, is not sustainable. Moreover, the 'breakdown between equities and bond yields reveals how divided investors are over the sustainability of the economy's recovery'. That is, while equity investors believe a strong and rapid recovery, bond investors view that the economy will only get short-term boost.

We believe investors view on economic outlook has important impact on gold price. The Fed anticipates inflation rate will stay below 2% in the coming 2 year. If the Fed is correct, then the current bond yield (3.46%) is not too low. If traditional theory suggesting the movements between stock prices and bond yield are in the same direction is correct, then current stock prices are probably too high. Given the recent inline movement between stocks and commodities (including gold), the theory suggests that both will fall in the coming future.