Forex Blog

January 26, 2012

Recession Fears Could Delay UK Deficit Reduction Plans

Filed under: OANDA News — Tags: , , , , , , , — admin @ 1:39 pm

On Wednesday, the Office for National Statistics (ONS) revealed that the UK economy contracted by 0.2 percent for the final quarter of 2011. Economists had predicted a slight increase of 0.1 percent for the last three months of the year.

Despite the feeble ending to the year, the latest ONS data shows overall growth for 2011 was a mediocre, but still positive, 0.9 percent. Still, this level of expansion is well below the Bank of England’s 2 percent growth target and there is a real concern that the economy will continue to shrink during the first half of 2012.

This could hardly come at a worse time for the British government. Like many of its G8 counterparts, the UK is faced with the dilemma of promoting growth, while at the same time, keeping a lid on spending. In fact, government spending was a central theme in the 2010 election and resulted in a coalition government led by Conservative Prime Minister David Cameron together with the Liberal Democrats.

The new government came to power on a promise to address the country’s out-of-control spending which few would argue was not already well beyond a crisis point. And that is actually saying something as Great Britain has a long history of deficits.
In fairness, some of this debt was accumulated as part of the effort to fight two major wars, but even in peace time, Britain typically spends more than it earns.

During the 1970s and 1980s, high levels of inflation forced the government to rely on borrowing to maintain spending programs. In the span of those two decades alone, total debt rose from £33.1 billion ($51.6 billion) in 1970 to £197.4 billion ($308.0 billion) by 1988.

Since then, Britain has actually increased its reliance on deficit financing. By 1997 total public debt was £352 billion ($549 billion), but by the end of 2009, debt had once again more than doubled and has now broken through the £1 trillion ($1.6 trillion) barrier.

Britain’s 2011 deficit is expected to be in the range of £150 billion ($234 billion), making it only marginally better than the previous year’s deficit of £170 billion ($234 billion) despite a full year of government spending cuts. The country’s debt to GDP ratio is still nearly 80 percent and with weaker growth expected in the coming year, this statistic could worsen.

Both the Bank of England and the International Monetary Fund (IMF) recently downgraded earlier growth projections for 2012. The IMF slashed its prediction by a full percentage point and now expects the British economy to expand by only 0.6 percent this year.

Eurozone Crisis and Austerity Measures

With its close proximity and trade ties with Europe, Britain is heavily exposed to the uncertainty arising from the Eurozone debt crisis. In late November, the Organization for Economic Development and Cooperation (OECD) released a stark statement warning that the UK will almost certainly face another recession in the first half of 2012 because of the turmoil in the Eurozone. Britain has already recorded one quarter of negative growth – should the first quarter of 2012 also be negative, the OECD’s prophecy will come true.

While there is little the government can do with respect to solving the Eurozone issue, it will be interesting to see if the government moderates its drive to eliminate the deficit in deference to the slowing economy. Reducing the deficit is necessary, but it is impossible to dramatically slash spending without impacting growth. With growth already on the decline, it may be advisable for the government to moderate its spending reduction plans at least until the economy gathers strength.

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January 18, 2012

World Bank Downgrades Global Growth Outlook

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On Wednesday, the World Bank revised its global growth projections to reflect the deteriorating debt situation in Europe. Comprised of over 180 member countries, the World Bank predicted last June that global activity for 2012 would expand by 3.1 percent. The downgraded outlook now places global growth for 2012 at just 2.5 percent, with most of the growth slated for the emerging economies.

In fact, noted World Bank economist Justin Lin, Europe was likely already in recession and could trigger a return to the turmoil that led to the recession of 2009.

“The risk of a global freezing-up of the markets and as well as a global crisis similar to what happened in September 2008 are real,” Lin told reporters in Beijing.

The Bank of Canada agreed with the World Bank’s assessment of the situation in Europe saying on Wednesday that Europe will likely be in recession for most of 2012. The Bank also said it expected the impact will cost the Canadian economy about $10 billion due not only to lost export sales, but also a general decline in world-wide investor confidence and the impact this will have on global markets.

In November, the Federal Reserve likewise revised downwards its outlook for 2012. The Fed predicted that growth would expand by only 2.5 to 2.9 percent compared to its earlier view of between 3.3 and 3.7 percent. News of a more positive nature came in the form the Fed’s “Beige Book” which showed that for seven of the twelve regions surveyed, the last quarter of 2011 ended on a more upbeat note compared to the year before.

Despite the year-over-year gains, the recovery is still being held in check by two significant forces; a still-depressed housing market and stubbornly-elevated unemployment rate.

The longer-term view provides little optimism for a quick fix for either predicament. As a result, the Fed remains committed to its low-interest rate policy that will see the Federal Funds rate capped at 0.25 percent until mid-way through 2013.

Greece Close to Deal with Creditors

One hopeful sign from Europe is the latest news suggesting that Greece could be close to inking a deal with its major bond holders. Late last year, a committee made up of thirty-two of Greece’s private creditors was formed to lead the negotiations to set the guidelines for addressing about 200 billion euros ($254.6 billion) in debt due to mature in the first half of 2012.

An agreement reached Oct. 26th of last year called for these soon-to-expire bonds to be swapped for new bonds with a significantly discounted face value expected to be about half of the original par value. Discussions are now said to be centered on the interest rate these new bonds will pay; insiders expect the annual interest rate will be between 4 and 5 percent with 20 to 30 year maturity dates.

Foreign currency markets reacted positively to the news of a potential agreement with the euro gaining half a percent on the dollar yesterday. The euro gained another 0.9 percent by early afternoon in New York rising to a 12-day high of $1.2853.

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December 9, 2011

EUR Tape Bombs to continue

Filed under: OANDA News — Tags: , , , , , , , , , , , — admin @ 4:27 am

In the wee hours of this morning in Brussels, all 17 members of the Euro zone and ‘aspiring’ future members, resolved to negotiate a “new” agreement alongside the EU treaty with a tougher deficit and debt regime to insulate the region against the debt crisis. The stricter budget rules will, however, leave the UK and Hungary in the cold. To achieve an agreement, EU leaders dropped their demand that investors share the cost of bailouts. This had been Germany’s biggest stumbling block for the past two-years.

The EU Summit agreement was largely in line with expectations and the draft report released yesterday, and it represents another step in the direction of an integrated fiscal “compact”. The acid-test will be, of course, if such an agreement could ignite sustained recovery in appetite for Spanish and periphery bonds (the ECB was buying bonds in the market this morning). Thus far, no one is sure whether the deal thrashed out overnight is really the big breakthrough hoped for before the summit, because the negotiations are still going on. On the face of it, probably not. The market needs to be convinced that the EU actions will be great enough to avoid a credit downgrade from the ratings agencies, which could come as early as next week.

The key features of the proposal:

  • Agreement on a semi automatic fiscal rule (in line with the Merkel-Sarkozy proposal earlier this week)
  • Bring forward the launch of the ESM to mid July 2012
  • Possibility of increasing the size of the ESM above +€500b to be discussed in March 2012
  • No PSI in the ESM as a precondition, but adherence to the “well established IMF principles and practices”
  • Voting by a qualified majority (85%) instead of unanimity for the emergency procedure in case of the ESM
  • Discussion about an IMF provision of an additional +€200b of resources – to be confirmed in 10 days

November 17, 2011

Cumberland Advisors’ David Kotok: The Eurozone Crisis and The U.S. Economy

Filed under: OANDA News, Uncategorized — Tags: , , , , , , , , , , — admin @ 6:51 am

By Scott Rubin

Benzinga Radio recently had the opportunity to speak with David Kotok, the founder and Chief Investment Officer at Cumberland Advisors.

Kotok is a frequent contributor to CNBC, Bloomberg, Fox Business, Yahoo Finance, and other financial media outlets. His articles and financial commentary have also appeared extensively in The New York Times, The Wall Street Journal, and Barron’s, among others.

According to Kotok, at this point, Italy has become the center of the crisis. If the Italian government is unable to roll its debt, it will signal the next leg of contagion has arrived and the situation will deteriorate further. Conversely, if Italy is able to access the markets, it could potentially become a turning point, he said.

“If the market doesn’t provide financing, then there is a real problem,” Kotok said, “because Italy is the third-largest issuer of debt in the world. It is a huge amount of debt, a large country in Europe, and has a very high debt-to-GDP ratio.”

The second major event, Kotok said, will take place in Greece. The country must roll its debt in the second half of December. Greece, however, does not have access to its bond markets and will be forced to rely solely on EU bailouts.

“At the same time, Greek revenue does not match expenditures – even if we cut the expenditures,” Kotok said. “So, the country is not sustainable. We have a real collision course in Greece.”

While the European Central Bank (ECB) reactivated its bond-buying program in August in an effort to help shield Italy, Spain, and other debt-strained euro nations from rising yields, there is considerable political pressure – including from the U.S. – for the ECB to do more.

A contingent of global leaders want the ECB to become the lender of last resort to the struggling EU nations and essentially fully monetize their debt through massive bond purchases financed by money printing. Kotok thinks that in the end, this is likely to happen. He said that while the ECB clearly does not want to take this step, there may be no choice.

“Central bankers don’t like to monetize,” Kotok said, “but central bankers also have another test. That is, when you are faced with catastrophe, do you let the economies melt down into a slump, or do you provide the emergency finance, even though you don’t want to do it?”

According to Kotok, European banks also find themselves in a similar situation as the sovereigns with regard to their ability to roll debt and access the markets. The issue is exacerbated by complex oversight mechanisms within the EU, where banks are surveyed and regulated by their respective national banks.

On the home front, Kotok told Benzinga that he is of the view that the U.S. can continue to grow despite the current turmoil in Europe. He said that he thinks growth is picking up slightly in the fourth quarter and that he is not currently in “the recession/double-dip camp.”

“There is a lot of evidence – especially recent data releases – to support the fact that we will have slow growth, but that’s not shrinking,” Kotok said. “That’s growing.”

As a result, Kotok said that he thinks that stocks are cheap, but he did concede that it all depends on your view of whether the U.S. economy is headed towards another recession. In this, his outlook is pretty straightforward.

“So, the real question is: do you bet on a recession, or do you bet no recession?” Kotok said. “If you bet no recession, then you want to own stocks, because they are cheap. If you bet on a recession – you think we are going to have one – then you don’t want to own any stocks. You want to live in the cave and bring in bottled water and canned food.”

Listen to the full episode on Benzinga Radio here.

October 26, 2011

Finance Minister Says No Recession Likely for Canada

Filed under: OANDA News — Tags: , , , , , , , , , , , , — admin @ 9:34 am

Canadian Finance Minister Jim Flaherty told a press conference on Tuesday that despite uncertainty in the Eurozone and a slowing U.S. economy, he expects Canada will remain resistant to recession. Nevertheless, the Finance Minister noted that he is prepared to act if necessary noting that the government will consider further stimulus spending if conditions warrant.

Despite the Minister’s optimism, recent feedback shows that the Canadian economy is slowing with a more modest level of growth now expected in the coming months. Acknowledging the revised outlook, the Minister noted that the government will keep close tabs on the situation and is prepared, if necessary, to provide stimulus as was done during the previous recession.

Comments from Bank of Canada

On the topic of stimulus spending, the Bank of Canada voted to maintain the current 1 percent overnight rate noting that “considerable stimulus” remains in the Canadian economy. This was due to previous government spending and the continuation of record-low interest rates. This comment was taken as a sign that the Bank of Canada does not intend to intervene at this point and interest rates are expected to remain unchanged well into next year.

The Bank of Canada statement did raise eyebrows, however, with a prediction that the Eurozone would likely fall back into recession next year. While the Bank expects the recession in Europe to be short-lived, the potential impact of negative growth in the Eurozone, together with a downgraded outlook for U.S. growth, were cited as potential risks to growth in Canada.

October 24, 2011

EURO Rhetoric Ticker To Dominate

Filed under: OANDA News — Tags: , , , , , , , , , , , , , — admin @ 4:28 am

Risk edged higher over the weekend, but for how long? Market expects the Eurozone to announce significant measures Wednesday at bolstering the EU bailout fund. Some of this risk has been pared back this morning by the realism of weaker Euro economic fundamentals.

The weekend meeting yielded few concrete measures to deal with the Greek solution, the EFSF or recapitalization of the banking sector, investor “hope” that a formal proposal will be presented at this Wednesday’s follow up meeting. Until then, capital markets will have to live by the Euro-rhetoric ticker tape.

This morning’s ‘second successful, and markedly sharper overall contraction in Euro-zone manufacturing this month’ (47.2 vs. 49.1), heightens fears that the region is headed for contraction in the fourth quarter and the possibility of slipping back into recession. How strong is the investor’s faith in Europe or has the Euro’s collateral damage been too great?

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The dollar is higher against the EUR -0.25%, GBP -0.05%, CHF -0.38% and lower against JPY +0.16%. The commodity currencies are weaker this morning, CAD -0.04% and the AUD -0.03%.

On Friday, Canadian CPI increased +3.2% in September from a year earlier, compared with an August pace of +3.1% and a May peak of +3.7%. Posing a bit of a problem is core-inflation accelerating to +2.2%, up from August’s +1.9% pace to reach the fastest rate since in three-years. Despite inflation tapping through the BoC desired level, Governor Carney has said he has “considerable flexibility” in how fast inflation returns to the bank’s desired rate, as the country faces a weak US recovery and uncertainty over the European debt crisis that could tip the global economy into another recession. Technically and fundamentally, analysts will tell you that Carney is “looking through near-term volatility in inflation”. Investors are beginning to pare their bets that the bank’s next move will be a cut.

Ending the week on its strongest note, the loonie rallied on hope that the EU policy makers will make headway in containing the region’s debt crisis, bolstering demand for riskier assets. During last week, and similar to other growth sensitive currencies, the loonie was subjected to whiplash, all caused by the dreaded Euro headline ticker. Any time traders think the currency is gathering enough momentum to take on the stronger dollar, negative Euro rhetoric promotes risk aversion action.

The loonie, as it has done all last week, remains vulnerable to following the broader trends, especially what is transpiring in Europe on the verbal front.There’s tremendous sensitivity because of the unprecedented Euro event risk. The market remains a good buyer of dollars on dips ahead of parity (1.0056).

Anything positive about China will be positive for the AUD. The Aussie has maintained it two day gains outright, not without some volatility. Chinese manufacturing data released O/N signals that their manufacturing may expand (51.1 vs. 49.9) for the first time in four-months, boosting demand for higher yielding assets. However, AUD gains have been limited on the back of domestic data, Aussie PPI slowed in the third quarter (+0.6% vs. +0.8%) and as EU policy makers have failed somewhat to assure investors that they are nearing a solution to the euro-area debt crisis. Futures Traders are pricing in at least a 25bp cut in borrowing costs by the end of the year.

The RBA minutes last week were neutral in tone and failed to give any additional information. When it comes to cutting rates, EU holds the key and the RBA is not expected to be pro-active ahead of the G20 meeting in Caen at which Europe is due to reveal its “comprehensive policy package”.

The dollar remains susceptible to fluctuations in risk appetite, with global markets not embracing risk whole heartily, the interest to buy AUD on dips has wained, better sellers on rallies are appearing (1.0396).

Crude is higher in the O/N session ($87.68 up+$0.28c). Oil rose for the first time in three days Friday, on hope that EU policy makers will reach a deal to contain the region’s debt crisis. Positive sentiment out of Europe coupled with s surprisingly positive US earning season is providing another injection of risk appetite across the financial and commodity space. Despite fundamentals being tighter than they were four years ago, the “current geopolitical context creates significant tail risks in a world with such limited spare capacity”. Asset classes remain at the mercy of Euro rhetoric.

Last weeks EIA crude stocks fell by -4.70m barrels to +332.90m, and remain in the upper limit of the average range for this time of year. Stockpiles were forecast to climb +2m barrels. Gas was not going to be left behind, its inventory print also moved down by -3.30m barrels, a week after decreasing -4.10m. This too remains in the upper limit of the average range. Inventories of distillate fuel (heating oil and diesel), decreased -4.27m barrels to +149.7m, the biggest drop since November. Oil refinery inputs averaged +14.4m barrels per day during the week, which were +134k barrels below the previous week’s average as refineries operated at +83.10% of their operable capacity.

After this weekend’s summit release the market will begin turning its attention back to supply issue questions as Libya comes back online. Until then, expect investors to run into technical selling on some of these steeper rallies as they wait for a clearer idea of where we are going on the economic front.

The yellow metal rallied the most in a week on Friday, as a drop in the dollar and renewed optimism that Europe will act to tame the debt crisis boosted investor demand. For most of last week, the escalating worry about Europe’s inability to resolve its debt problems had precious metals trading on the back foot. The metal’s price purge earlier in the month definitely provided a better price opportunity to own the shiny metal. Gold is still seen as a safe haven or a store of value, at least in the mid to long term. For a fourth consecutive trading session, the yellow metal has been moving in tandem with riskier assets and inversely with the dollar.

Right now, we are back to the inverse dollar-gold correlation play and the belief that a larger Euro rescue package could curb the demand for the metal as a protection of wealth. It seems that the demand for ‘physical’ gold from India is providing the only support on these pullbacks. Fundamentally, the commodity is trying to find a balance ‘between the two opposing forces’, a risk investment or a safe haven play ($1,648 up+$12).

The Nikkei closed at 8,843 up+165. The DAX index in Europe was at 5,975 up+4; the FTSE (UK) currently is 5,496 up+8. The early call for the open of key US indices is higher. The US 10-year started the day backing up 3-bp on Friday morning (2.21%) and is little changed in the O/N session.

Treasury 10-year notes stopped the slide by day’s end on Friday, with prices rallying for the first time in three-weeks as concern European leaders may not agree on containing the region’s sovereign debt crisis spurred demand for the safety of US debt. Further out the curve, it was a different story. Yields on the long-bond climbed for a fourth consecutive week (longest losing streak this year), as reports showing inflation increased last month eased optimism about the Fed’s purchase of longer-maturity debt in “operation twist”.

European finance ministers began six-day’s of negotiations at the weekend, aimed at preventing a Greek default and shielding banks. Capital markets continue to be fueled by Euro-headlines. The Treasury market for the near term has become “policy-dependent, not data-dependent”.

September 28, 2011

U.S. Business Spending Higher in August

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It is estimated that American businesses continue to maintain $2 trillion in reserve cash but remain reluctant to use this money to expand operations and hire more workers on fears that another recession is looming. In July, business expenditures as tracked by non-defense capital goods orders, declined 0.2 percent – for August, this category recorded a 1.1 percent increase in spending.

This increase is seen as an indication that businesses feel the likelihood of another recession in the near-term has diminished and it is hoped that should business continue to spend, it could lead to a gain in employment.

The Commerce Department also noted that orders for durable goods slipped by 0.1 percent in August after a 4.1 percent gain in July. The actual result was better than the 0.5 percent decrease expected so even this news is being interpreted as a positive signal.

Source: Reuters

September 22, 2011

Stock Sell-Off in Wake of Federal Reserve Statement

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Global stock markets were in decline Thursday following yesterday’s statement from the Federal Reserve following its two-day policy meeting in Washington. The Fed statement said that “significant downside risks” threatened the U.S. economy raising fears that the global economy was heading for another recession.

“The storyline is that global growth is decelerating,” Mike Ryan, the New York-based chief investment strategist at UBS Wealth Management Americas, said in a telephone interview. His firm oversees $774 billion. “Financial stresses are rising and policymakers are finding few viable options to stabilize the real economy.”

Source: Bloomberg

Recession Fears Drag Canadian Dollar Below Parity

Filed under: OANDA News — Tags: , , , , , , , — admin @ 7:41 am

The Canadian dollar – known as the “loonie” – fell below parity with its US counterpart after losing more than two cents in early morning trading in New York. Investors turned to the safety of the US dollar as commodity prices fell in response to the yesterday’s pessimistic outlook from the Federal Reserve. Rising global economic uncertainty has pushed investors to the greenback as it is perceived as a safe option during times of financial turbulence.

Source: The Canadian Press

September 15, 2011

Merkel and Sarkozy need Today’s Philly Fed to Bounce

Filed under: OANDA News — Tags: , , , , , , , , — admin @ 4:20 am

Currently, the market is betting on “convinced”, Merkel and Sarkozy are convinced that Greece will remain one of its fraternity members. Papandreou looks likely to be receiving the next tranche of IMF funds (EUR8b) to increase the chance that the private sector initiative to reschedule Greek debt will meet the required threshold. In theory, this ‘combo’ eliminates the risk of Greek default until the next IMF review in December.

Ever since Germany and France showed their hand, the EUR has strengthened, but not materially so, as investors, in the ‘house of cards’ play, deal with a Euro-zone debt debacle, tenuous US economic data and a potential Fed policy change that can confirm or reject the rising call for more stimulus. The gravest problem facing the region is the recent collapse in growth indicators. Without more rapid nominal GDP growth the Euro-zone will remain unstable almost regardless of policy action to pass around ‘limited funds’. The last thing the region requires is the US to enter an official recession, they need this morning’s Philly Fed to bounce.

The US$ is mixed in the O/N trading session. Currently, it is higher against 10 of the 16 most actively traded currencies in a ‘subdued’ session.

Forex heatmap

Yesterday’s US data offers more evidence that the economy stalled in August. Retail sales were well below analyst’s forecasts and July was revised down, even wholesale prices recorded a similar print of being flat. This gives the Fed the green light to do something at next weeks meeting. Consumers are wary to spend. All along they have been the Fed’s ‘go to’ variable. With unemployment remaining high and the recovery weak, retail and food services sales were unchanged for the prior month. PPI showed no momentum either, as lower energy costs offset higher food prices. Fundamentally, the US economy has hit a brick wall, flat sales and wholesale prices, no job growth, unemployment rate on hold (+9.1%) and inflation moderating adds up to a whole lot of nothing happening in the US economy. If we included the Euro debt debacle, the US congress inability to agree on a job stimulus package, then we are talking about another recession. The market now expects something extraordinary to be tabled at the FOMC meeting.

The dollars is lower against the EUR +0.10%, GBP +0.16% and higher against CHF -0.07% and JPY -0.06%. The commodity currencies are weaker this morning, CAD -0.22% and AUD -0.36%.

The loonie started the week under water outright and above parity as risk aversion was aggressively applied on Greek fears of a default. The currency was able to take back some of those losses, however, renewed uncertainty after an Austrian parliamentary committee delayed a vote on an increase in Europe’s bailout fund has the CAD eyeing parity again. There is some genuine interest to own the loonie at these levels by corporate Canada, once this business is concluded the currency is in real danger of weakening much further on the back of broader risk aversion sentiment. Merkel and Sarkozy can only prop up the EUR for so long.

Last week was the second consecutive week for the currency to decline as the BoC kept rates on hold as expected (+1%). Tenuous data south of the border showing the US economy hitting a brick wall does not support the currant loonies’ relevant strength. The US remains Canada’s largest trading partner and an extended slowdown will eventually percolate hard throughout the Canadian economy. Governor Carney has applied the expected ‘dovish’ tone on the Canadian economy, explicitly noting ‘the need to withdraw monetary stimulus has diminished’ which is an ‘expected about-face from the July statement. The Governor will be turning towards becoming more concerned about global growth.

Analysts are beginning to downgrade Canadian growth this year and next, largely based on a downgrade to the external environment in which the Canadian economy is operating. There are better buyers of dollars on dips (0.9924).

Governor Bollard at the RBNZ left interest rates unchanged O/N (2.50%), and signaled no urgency to raise them until the global recovery strengthens, weakening the Kiwi and dragging down the neighborly Aussie in the process. The pricing for RBNZ rate hikes over the next 12 months fell-4bp on the back of the announcement.

The AUD had tumbled earlier this week to a new one month low outright and versus the JPY on fears that Greece may default and on a weak business outlook. The NAB business confidence index earlier this week fell to-8 last month, the lowest level in two-years. Manufacturing, retail, wholesale and construction conditions all remained very weak, while mining and the service industries generally remained strong. Now that the domestic data is coming out a bit negative, there will be some questions ahead on what will happen to the Aussie economy. If anything, the RBA is likely to be on hold for an extended time, allowing investors to sell higher yielding assets.

Australia released a new methodology for calculating seasonally adjusted inflation that indicated the RBA’s core measures may have been lower last quarter. Under the new settings, CPI rose an estimated +0.7% in the second quarter and the weighted mean advanced +0.5%. There’s still strong interest to sell the Aussie on rallies and buy the dollar as it becomes tougher for the AUD to outperform while all eyes are on European issues (1.0247).

Crude is lower in the O/N session ($88.35 down-0.56c). Oil declined yesterday after the weekly EIA data reported that fuel inventories climbed, demand dropped and retail sales hit a brick wall in the US.

Last week’s EIA inventory report revealed that crude stockpiles decreased by -6.7m barrels to +346.4m, above the upper limit of the average range for this time of year. On the flip side, gas inventories moved up by+1.9m barrels (the biggest gain in three months), after increasing +200k barrels in the prior week, and are above the upper limit of the average range. The market had been expecting gas stocks to ease by-500k barrels. Fuel use fell -3.8% to +18.7m barrels a day. Refineries operated at +87% of capacity, down -2.3% points from the prior week.

The big crude drawdown was discounted because of tropical storms which reduced production. With the ongoing weakness of gas consumption crude remains better offered on rallies.

Despite gold finding a temporary base just ahead of $1,800 earlier in the week, bullion was able to erase some of the bounce gains yesterday on the back of the Chinese White Knight potential. US equities rallied for a third day, and the dollar rose against a basket of major currencies, reduced the appeal of gold as an alternative investment. Year-to-date, the commodity has rallied +44% and it is in its eleventh bull year.

Technical analysts believe that commodity prices have recently undergone a strong correction, followed by a decent consolidation and particularly as European sovereign concerns remain. Investors are guessing that the Fed will be required to ease monetary policy in answer to stimulate their economy. The Fed’s efforts to drive interest rates lower to support lending should curtail the dollar’s appeal and by default, support commodities eventually ($1,818-$8.20c).

The Nikkei closed at 8,668 up+150. The DAX index in Europe was at 5,443 up+103; the FTSE (UK) currently is 5,309 up+83. The early call for the open of key US indices is higher. The US 10-year backed up +8bp yesterday (2.02%) and is little changed in the o/n session.

Treasuries yields rallied for a third consecutive day on “eased” concern that the Euro-zone’s debt crisis may cripple the region’s banks and on pressure from this week’s supply. This is a temporary fixed income excuse as dealers begin to position themselves for the FOMC meeting next week.

Yesterday was the last of this week’s three auctions. The $13b-long bond issue was well received as everyone expects the Fed to take action by purchasing assets out the curve, which is driving buying in the long end (Operation Twist).

The 30-year bond drew a yield of +3.31%, below the previous record of +3.54% at the February 2009 offering. Indirect bidders took down +39.4%, compared with +12.2% at the August auction, the lowest level since February 2008. Direct bidders bought +17.3% of the notes at the sale, compared with an average of +11.6% for the past 10 auctions. Some dealers now see a +50% chance of a cut in interest on excess reserves at next week’s Fed meeting.

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