It is perhaps a bit premature to jump to conclusions but today's price action in the overall commodity sector seems to be signaling that a subtle shift is occuring in the minds of some investors in regards to the Fed and the upcoming end to QE2 at the end of next month.
Fed governor Bullard might have been the one who got the ball rolling by his comments from yesterday when he stated that there would more than likely be no monetary tightening until later next year. That put a firm bid under many commodity markets and kicked some of them strongly higher yesterday. It also seemed to pull the Dollar down somewhat from its best levels of the session even while it was supported by an aversion to the Euro based on the woes in Euroland.
Today we are seeing a sharp rise in the CCI (Continuous Commodity Index) which has taken it up past that key 640 level that I am closely monitoring. We are also seeing the Dollar unable to push higher. With money flows coming back into the commodity sector, it comes as no surprise that those markets which led the sector lower are now leading the sector higher. That is why silver is so strong this morning. Also, crude oil is trading closer to $101.
What might be happening is that investors are looking at the ugly chart pattern forming on the S&P and seeing this recent near-collapse in commodity prices and putting two and two together. What I mean by that is they are thinking that while the come-down in commodity prices, notably energy and some foods has been welcome, no one wants to see a collapse of the magnitude of 2008. It was not that long ago when I posted a comment here at my site and wondered whether a deflationary mindset was creeping back in. That word, "deflation", sends dread and fear running down the backs of Chairman Bernanke. Bernanke will not let such a mindset get firmly established.
With fears of a slowdown in growth for the emerging markets, and a concerns that recent US economic data has been weak, traders are beginning to suspect that the doves at the Fed are going to have their way and that some sort of stimulus is going to be forthcoming from the Fed. Keep in mind that the Fed views as part of its mandate, growth in employment. With this sort of data coming out and with the thinking in connected circles that the sharp fall in commodity prices has taken the wind out of the inflation genie for the short term, the Fed now has room to come up with some sort of stimulus, whether that be another round of QE or something else.
Again, one day does not a trend make but I do find it noteworthy to see the extent of the money flows coming back into the commodity sector today. That would not be occuring unless traders believed that the Fed was going to shift gears and perhaps become more accomodative. It could be that the consensus is that the Fed overshot it to the upside the first time around, then overshot it to the downside by sounding too hawkish of late and now may be trying to find a happy medium.
Either way, for today at least, watching copper moving up nearly 2.5%, enough traders think that something friendly is coming down the pike and is paving the way for "risk trades" to return.
"When misguided public opinion honors what is despicable and despises what is honorable, punishes virtue and rewards vice, encourages what is harmful and discourages what is useful, applauds falsehood and smothers truth under indifference or insult, a nation turns its back on progress and can be restored only by the terrible lessons of catastrophe." … Frederic Bastiat
Evil talks about tolerance only when it’s weak. When it gains the upper hand, its vanity always requires the destruction of the good and the innocent, because the example of good and innocent lives is an ongoing witness against it. So it always has been. So it always will be. And America has no special immunity to becoming an enemy of its own founding beliefs about human freedom, human dignity, the limited power of the state, and the sovereignty of God. – Archbishop Chaput
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