Central bank announcements fail to inspire

The announcements of the three central banks - the US Fed, Bank of England and the ECB - were non-events.

The message was that interest rates will remain low for an extended period of time. The S&P 500 breached 1700 for the first time after US investors digested the Fed’s stance on keeping QE for the time being.

The landscape has changed from hesitation to welcoming liquidity; there’s also an undercurrent of optimism from economic data that will be announced later tonight: jobs growth is expected to be maintained, household income is viewed as healthy, trickling down to a surge in ISM manufacturing index (Thursday).


China’s PMIs from HSBC and officials showed divergence. The HSBC PMI for June dropped from 48.2 to 47.7 last month, while the official PMI showed strength from 50.1 to 50.3. This divergence can be explained by the sampling sizes, with the HSBC survey skewed towards exporters and the time these were taken. It is clear the Chinese government is doing what it can to keep the economy going and it will not allow growth to miss the 7% target.

Copper prices reacted to the flash PMI, pushing up over 1% and staying above the $300 we see as the main support level (mentioned 31 July report). Copper prices mirror the trend of China’s manufacturing PMI; the dips and peaks are consistent with prices. We hold the view that if there’;s stability in China, we could see consistent demand in industrial metals, which should put a halt in the declining prices we have seen for most of the year.

Precious metals gold and silver found some sellers after a good run in July. The divergence between gold and the S&P500 first appeared in July 2011 and again in October 2012 when investors found the allure of equities too difficult to dismiss. Since October 2012, gold has returned -27.6% versus the S&P500 +25%.


Crude prices have reacted to global growth, with both US and China the top two largest users of crude; signs of growth in these two economies are positive for crude prices. WTI is closing its gap with the global benchmark Brent, which shows investment in infrastructure is eliminating some of the landlocked issue of domestic crude.

We can see that the US crude production has increased significantly since 2011; recent EIA data showed a drop in crude stockpiles in Cushing by 4% for the week ending July 26. We hold the view that stockpiles are still high and the driver of WTI is broader optimism in the US economic recovery.

The abrupt cut in Libya’s export provides further support in Brent prices. Technically, we see Brent supported at $107 and resistance at $110. WTI support is at $104, with resistance level at $108.

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