The long-awaited Jackson Hole symposium turned out to be a non-event with Fed Chairman Ben Bernanke not signaling additional quantitative easing measures in his speech. Yet, this had not driven much disappointment. Wall Street reversed initial losses and ended the day 1-1.5% higher. Bernanke's speech sent an indication that the US economy is not too bad and his view of long-term outlook is 'more optimistic'. More importantly, the Chairman said that the Fed 'has a range of tools that could be used to provide additional monetary stimulus' and the September FOMC meeting will 'allow a fuller discussion' on the economic outlook and Fed's actions.
At his speech titled 'The Near and Longer-term Prospects for the US Economy', Bernanke focused little on the near-term outlook but more on the long-term prospect. The Chairman did not discuss easing options. Rather, he said the FOMC meeting in September will be a 2-day, instead of a one-day, one so that policymakers can have a 'fuller discussion' on economic and financial developments, as well as stimulus tools. Bernanke did spend some time in talking about fiscal issues. He stated that 'US fiscal policy must be placed on a sustainable path that ensures that debt relative to national income is at least stable or, preferably, declining over time. He added that recent negotiations on debt ceiling has probably 'disrupted financial markets' and the economy and 'the country would be well served by a better process for making fiscal decisions'.
Our economists retained the view that the Fed need to roll out additional easing measures to bolster the economy. The Jackson Hole speech, however, allowed the Fed to buy more time for more considerations and gather more evidence that the economy is moderating.
Crude oil: With exception of natural gas, the complex gained over the past week. Although news that the civil war in Libya may end soon had sent Brent crude lower on Monday, prices soon recovered with supports from Shell's force majeure in Nigeria and possible EU sanctions on imports of Syrian oil.
While oil prices have been trading choppily and with high volatility in recent weeks. The WTI-Brent crude spread has been moving steadily. We believe the record level of the spread is not justified. Worries that domestic production and Canadian oil exports will sharply increase oil inventory in Midwest (PADD 2) have been overdone. Indeed, the crude stockpile in the district has been declining over the past 5 weeks. Stock in Cushing, Oklahoma, where Nymex crude is stored, has reached the lowest level since November 2010 after 4 consecutive weekly drops.
US natural gas storage increased +73 bcf to 2 906 bcf in the week ended August19. Stocks were -140 bcf less than the same period last year and -55 bcf below, or -1.9%, the 5-year average of 2 961 bcf. Separately, Baker Hughes reported that the number of gas rigs fell for the first time in 4 weeks, by -2 units, to 898.
As hurricane Irene gets stronger, it is expected to strike North Caroline on Saturday. The impact of the storm on near-term natural gas price is mixed. On the demand side, some forecast it will lower consumption as the rain and wind will reduce cooling demand. On the supply side, damages on gas pipelines may disrupt production. We expect the net result will be higher injection.
Precious Metals: After rising to a record high of 1917.9, gold slumped on profit-taking and a temporary ease in global economic concerns. Losing -2.96% on weekly basis, the benchmark Comex contract declined for the first time in 8 weeks and recorded the biggest drop since May. Concerning volatility, the yellow metal had probably not experienced the same level of choppy trading since 2008. For a second time in a month, CME raised margin requirements of trading gold last week. The initially margin will increase to 9450/100 oz from 7425, up +27%, while the maintenance margin will also rise by the same percentage to 7000 from 5000. While gold's slump might have been partly driven by the margin increase, CME's move do not always dampen gold prices. When the exchange increased margins by +25% in 1Q20, gold price jumped +3.54% on the effective date of February 12 2010 and the rise carried on for a week. The metal merely dipped -1.79% after the CME raised margins by +20% on December 15, 2009.
Gold's selloff found supports above 1700 and rebounded. Closing at 1794.1, the metal remained at elevated levels. A lot of buying interests over the past few weeks were driven by speculations that Fed Chairman Ben Bernanke would hint QE3 at the Jackson Hole symposium. We were indeed amazed that the metal managed to rebound although there was nothing announced in the end. Gold's resilience indicated that the market remained concerned about the global economic outlook. We retain our view that the low rate environment should continue to support gold and recent correction can be treated as a buying opportunity.