The Commodity Strikes Back

The bounce in commodities this week has been one of the major drivers of sentiments. The Bloomberg Commodity Index recovered to a five-week highs, lifted by a surge in crude prices.

Oil Rig
Source: Bloomberg

In the overnight session, US equities remained upbeat, as investors segued into the earnings season, although expectations for corporate profits were not cheery. Weak global demand and a relatively strong USD are expected to be major dampeners on US earnings. The S&P 500 closed up 0.8%, trading up to just five points away from the key 2000 mark, a level not seen since the plunge in late August.

PepsiCo and Yum Brands were among the few companies kick-starting the earnings reporting this week, while 37 firms will be reporting next week, including Intel Corp, General Electric and a number of financial institutions such as Wells Fargo, Bank of America, JPMorgan, Goldman Sachs, and Citigroup.

Oil prices erased some of the early week’s gains on Wednesday, as the Energy Information Administration (EIA) reported that US crude production rose for the second time in three weeks. US inventories expanded by 3.07 million barrels in the week through to 2 October. The four-week moving average shows that US stockpiles have been on the rise since late June, although it is still significantly below the February-March levels.

A six-month moving average however, showed that current levels have reached a one-year low. Nonetheless, in early Asia trade, WTI futures recovered back above $48, indicating that traders may be more inclined to be persuaded by OPEC Sec-Gen’s prediction for increased global demand.

 

Return of the Chinese

China is resuming trade today after its week-long National Day celebrations. Judging from recent market developments, it is fair to say that the Chinese stock markets are expected to start on a positive footing, with plenty of catch-up action. Let’s look at some of the performance in key markets during China’s golden week, with contribution from my Melbourne-based colleagues:

  • Hang Seng +8%
  • H-Shares +10.5% (+4.7% yesterday)
  • S&P 500 +3.4%
  • MSCI Asia Ex Japan +6.8%
  • STI +6.1%
  • ASHR ETF (CSI 300 ETF) +6% – bear in mind, the 120-day correlation between the ASHR and CSI 300 is 80% (or 0.8)
  • Brent oil +6.3%

 

The (rate hike) hope awakens?

The release of FOMC minutes may hopefully elaborate on the debate around the global development concerns raised at the 16-17 September meeting. More clarity on how the Committee view the impact of market volatility on its decision to increase rates will be welcomed. But we are unlikely to see a set of criteria or conditions to be met for the first rate hike to take place. The Fed will want to stay on the path of data-dependent.

Moreover, it would be interesting to see if the decision to leave rates unchanged was more closely balanced than how the post-FOMC Fed speeches suggested. While the minutes would likely not contain any reference to last Friday’s extremely poor non-farm payrolls report, investors may still assess if there is any new language on the labour markets, and what it means for the medium-term outlook for US employment, and economy. A hawkish minutes will certainly raise hopes that we would indeed see a rate hike by end of this year. This will provide a fresh fillip to the greenback.

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