So much for Egypt, It is back to the economy. Rising bond yields are driving money out of the so-called “hot markets” and fears that the Fed is going to lay out tapering plans is causing a global market sell-off. Oil prices (NYMEX:CLU13) are now shifting their focus away from threats to supply and turning to potential threats to demand.
Quantitative easing of course helped drive money into the emerging markets and now the threat that the Fed is beginning the long journey back to rate normalcy, money is looking to exit the emerging market and move back to the U.S. India of course is freaking out and that is one of the reasons they have been putting a clamp down on gold and silver purchases. They are viewing gold purchases as a way for Indian wealth to flee the coming Fed taper onslaught.
Those fears extend to China as well. Many oil bulls are counting on China to propel oil to their target of $110 a barrel. Yet despite the signs that China’s economy may be stabilizing, the China dynamic has changed from what many have been used too. Not only is the lack of hot money going to work against the oil bulls but the continuing increases in U.S. production that will provide the market with an anchoring effect.
Not to mention that we are quickly approaching shoulder season and unless we see a storm threat develop, then the market is probably way overpriced. Oil has been boosted since July because of mainly geopolitical risks, not so much by surging demand or even demand expectations. Not only has the market been pricing in Egyptian turmoil but also trouble in Libya, Nigeria, Iraq and Iran. Yet once again the final determining factor for whether oil goes higher or lower from this point will be the Federal Reserve. That is why so many markets across the commodity spectrum are retreating ahead of the Fed minutes as they are getting ready to readjust. Thirty-year bonds and 10-year note yields, which hit the highest level since 2010 and 2011, are now retreating a bit yet they have led the Fed rate increase market movement.
Gold, which had been rebounding, is now retreating against a backdrop of a physical market that has been supported by Fed easing fear and the asset protection of money in the emerging markets. Once again the investment in gold is an oxymoron. Physical demand and demand from global central banks are buying like crazy and investment demand has been terrible but may be creeping back. Yet higher rates may thwart investor demand soon; it will be back to the tight physical side to carry the weight of the complex. Base metals are waiting not only on the Fed but on the Chinese industrial data.
Natural gas pooped on heat and being oversold. Fuel switching talk is all the rage providing the market with some support.