Tuesday, November 2, 2010

Commodities Rally as RBA Unexpectedly Raises Rate

Crude oil rallied to a 2 week high yesterday as PMI in China, India and the UK and US all recorded strong gains in October. Moreover, comment from Saudi Arabia's oil minister that consumers are happy with oil between 70 and 90 drove price higher. The front month contract for WTI crude oil surged to as high as 83.86 before closing at 82.95, up +1.87%. Gold plummeted after rising to a 2 week high of 1366.4. Better than expected ISM boosted the dollar and sent gold lower to 1350.6 at close. The benchmark contract settled at -0.52%.

ISM Manufacturing Index surprisingly improved to 56.9 in October from 54.4 in the prior month. The market had expected a dip to 54. The growth was driven by 'new orders', 'employment' and 'production' indices but was partly offset by 'inventories' and 'supplier deliveries'. Meanwhile, personal income contracted -0.1% m/m in September after rising +0.4% in August. Personal spending grew +0.2% m/m, easing from +0.5% in August. Inflation remained subdued with the core PCE deflation staying flat from a month ago. Economic data were mixed but should not change the Fed's decision to implement additional easing measures in November.

At the Singapore Energy Summit, Saudi Oil Minister Ali al-Naimi said oil prices are likely to stay in a 'very comfortable zone' for longer time then most people think'. Oil market is 'very well supplied. A little bit oversupplied but it doesn't seem to be depressing the price'. Moreover, Ali al-Naimi said that consuming countries are happy with prices between 70 and 90, a range wider than what he described (70-80/bbl) as 'ideal'.

Commodities strengthened in Asian session today as the RBA unexpectedly raised the cash rate to 4.75%. Oil rose to 83.45 and gold climbed to 1357.2 after the news. The first rate hike in 6 months was to combat inflation which may accelerate in the medium term. The decisions caught the market by surprise as the Australia's CPI was disappointing in 3Q10. The interest rate differential between AUD and USD widened, sending AUD closer to parity with USD.

The Fed will begin the 2 day FOMC meeting today. More and more economists forecast policymakers will announce to buy Treasury securities of 500B first. The Congressional election is another focus. Opinion polls show that Republicans may take over House bur Democrats will remain control in the Senate. As we discussed yesterday, the outcome should not affect gold's uptrend in the long term.

Courtesy of Oil N'Gold


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