While markets twist in the wind ahead of the Fed announcement, we see they are at the very least pricing in another extension of “Operation Twist.” While the yield curve is showing a little trepidation ahead of the big announcement the futures markets seem to be getting a bit of extra confidence from the cover they expect our friends at the Federal Reserve to provide. We see it really across the board among many commodities and really we have been pricing in some type of stimulus across the commodity spectrum. Oil, since it double bottomed near $81 per barrel, has managed to climb its way back as high as $85 despite very bearish fundamentals. With weakening economic data in the US, turmoil in Europe and OPEC continuing to pump into a globally oversupplied market, the only thing supporting this market is the hope of what stimulus might bring.
For gasoline we are at the low end of the trading range, not so much because the market believes that demand will be bad, but because of the benefits we will see as refiner’s ramp up production after gaining inspiration from increasing margins and an abundance of cheap crude.
That supply should increase and margins should continue to stay attractive as Brent crude falls versus West Texas Intermediate. This is due partly on a report from Reuters that Enbridge expects to complete an expansion of its newly reversed oil pipeline to Texas refineries by the end of this year. That would be sooner than previous forecasts used by the company and its U.S. partner. Enbridge and Enterprise Products Partners LP have been saying for months that they would boost the capacity of the Seaway pipeline from the Cushing, Okla., and storage7 hub to 400,000 barrels a day from 150,000 sometime in the first quarter of next year. This news has traders anticipating more oil and better margins and has even raised the possibility that the US will soon be an exporter of oil.
Gold has rallied more than $100 an ounce from its double bottom around $1,530 after breaking on the deflationary aspects of the possibility of a Eurozone break-up and now onto focusing on the red metal friendly policies that it now expects to see. Overnight there is a bit of a pullback as the trade take profits and fear disappointment.
Stocks have also soared as weakening currencies tend to send money on a quest for value and return. In fact in all the ups and downs of the recent volatility, E-mini S&P traders are talking about the almost picture perfect head and shoulders formation developing on the chart. It seems the only thing holding back the market from penetrating the neckline is a little boost from the Federal Reserve’s printing presses.
Even the soft markets are getting a boost from the hopes that the Fed can provide. Cotton has soared as it has anticipated easing. Oh sure, the Chinese did some massive surprise buying but that may be because they are flush with dollars. Not only have they been buying cotton but they have been buying up huge quantities of oil in the biggest supply build up since the Beijing Olympics. Now if they were just buying oil it might be interpreted that they are worried about a supply disruption because of Iran. Yet by buying cotton they may believe that the dollars that they hold may soon be losing value. Investment demand in China has soared to record levels as those with cash in China are looking to protect value.
Grains of course are surging on drought concerns yet dollar weakness will only add to the mix. Corn also may have to deal not only with the lack of rain but reduced yield due to the early emergence of the hated corn root worm. Soybeans are soaring as crop ratings start to fall. We need rain bad as the world is looking to the US to replenish depleted global supply.
So you see the Fed can make and break many a market today. Stocks and gold look a bit overbought and may need a surprise out of the Fed to keep the near term action going. Oil may see some outside support as the Iranian talks go nowhere!