The Federal Reserve may be flip-flopping its position on ending its bond buying program almost on a daily basis. On Wednesday when the market was tanking, the VIX was flying and treasury yields going to oblivion. The market seemed to be demanding more QE as the world sank deeper into a deflationary spiral. Then Fed President Richard Fisher told Fox Business David Asman a market correction doesn't mean the economy is in trouble. He said that no central banker in the world wanted more QE. At that point that was what the market wanted to hear. Almost immediately the stock market bounced back and some semblance of order was restored.
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Yet soothing words looked as though it was not enough to keep the rally going overnight into Thursday's session. Traders realized that if the Fed kept to the course and ended quantitative easing it would lead to a greater divide between the US and Europe and would drive up the dollar and pile on to the deflationary downward spiral around the globe. The Fed had to do something to manage the message or face another market route.
Enter St. Louis Federal Reserve President James Bullard, who shocked the market and flip-flopped by saying that the Fed should consider in response to deflation expectations to delay the end of the QE. How much of a flip flop was that. Well, James Bullard is a noted hawk that would have voted against QE before he would now vote for it, assuming he was a voting member, which he is not.
The point is that the Fed will be talking out of both sides of its mouth to try to ward off what may be another major downturn in the global economy. As I have said before that the divergent path of interest rate direction between the U.S. and the rest of the globe is almost inverse of where we were in the very early stages of the economic crisis back in 2007. To think that the U.S. can just continue to grow, raise rates and bury the rest of the world with weakening currencies is obviously unsustainable. The Fed realizes that and they also realize that there will be no real way to end QE unless Europe and Asia stabilize and add some QE of their own.
Now that QE is back on the table that should bottom many commodities unless the Fed flip flops again. This is entirely possible if the markets move too strong, too fast. Fed speak will dominate and fundamentals will enhance or detract.
Oil looks like we found a bottom in the near term as QE, geopolitical risk and strong gasoline demand offset rising US and OPEC oil production. The Energy Information Administration reported that U.S. oil production hit a 45 year high. That helped U.S. commercial crude oil inventories rise by a whopping 8.9 million barrels. But a drop in refinery runs and strong gasoline demand sprinkled with a few refinery glitches help add support late in the day.
On the geopolitical front, even in the face of a falling ruble, Russian President Vladimir Putin remains defiant when it comes to natural gas and Ukraine. Bloomberg Reported that " Putin, who was accompanied by OAO Gazprom Chief Executive Officer Alexey Miller, said he's worried Ukraine may steal Russian gas bound for European markets "There are big transit risks," Putin, who denies involvement in the Ukrainian conflict, said yesterday in Belgrade, Serbia. If Russia sees its Ukrainian partners "are starting to siphon off our gas from the export pipeline network, we will respond by reducing flows by the amount stolen."
When Russia has cut off gas in the past it has led to big spikes in oil as Europe seeks alternative energy sources. This time Europe will be better prepared but it is still a potential upside risk to oil at some point.
More QE may help OPEC. OPEC that has a policy of flooding the market with oil to regain market share and try to break the shale producer will benefit from the QE headwinds. Venezuela is getting desperate and needs to stop the oil price collapse before their economy totally falls apart.
Ethanol rallied after heydays report after a bigger drawdown in supply and a rally in corn. Natural gas dipped after yesterday's EIA injection report but then rebounded. The EIA showed +94 bcf, vs. +91 bcf expected, +105 bcf last week still 9% below 5 year average. Refill season is ending soon !
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