The Energy Report for Monday, August 2, 2010
Re-inflation
More soft economic data and more talk of quantitative easing have commodity markets on fire. Forget about that supply and demand stuff as that is going to be secondary to the financial hedge play that is starting to unfold. Commodities are rising even after it was reported that manufacturing in China contracted for the first time in 16 months. The HSBC China Manufacturing PMI fell to 49.4 in July showing contraction falling from 50.4 in June. Yet despite that weakness, the dollar takes a drubbing and despite the potential for weaker demand, commodities just continue to rise.
Why might that be happening? Now some think that may be because the Chinese will back off further tightening measures or it may be because they think the Chinese will again put their foot on the economic accelerator. Yet the real reason is that the global economy is again slowing, increasing the odds of dollar devaluation. We are seeing commodities move higher across the board in metals, energies and grains. That is not to say that there are not some supply and demand issues at play because there are. Whether it is drought in Europe or falling copper stocks or even worries about potential hurricanes, the truth is that the markets are looking in some ways beyond that. The commodity trade or the carry trade that served traders so well in the past is back in play.
The major catalyst for this play is the comments by St. Louis Fed President James Bullard who said that the Federal Reserve should use aggressive quantitative easing if it needs to stimulate the economy further, because promising to keep rates lower for longer increased the risk that the US would fall into Japan-style deflation. The most bullish thing for commodities is quantitative easing as those printed dollars instantly make dollars cheaper and commodities more expensive. By printing more dollars, you put a floor under commodities so this talk has been very bullish and bringing the funds back to the commodity long side.
Now on top of that for energy you have to focus on two tropical waves down in the Atlantic and one that according to the National Hurricane Center has about a 90% chance of becoming a tropical cyclone. This one currently is located approximately 950 miles West- Southwest of the Cape Verde Islands. The NHC says that this could become a tropical depression at any moment. The other storm has a much smaller chance of becoming a hurricane and is headed towards Nicaragua.
With all of that activity it is vitally important to be kept up to date with the latest breaking information. Just call me up so you can get our latest buy and sell points on all of the major commodities at 800-935-6487 or by emailing me at pflynn@PFGBest.com to open your account. And make sure you are getting your business news on the Fox Business Network where you can see me every day.
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