Financial markets rallied last week as mainly driven by the Fed's announcement of QE3. While commodities had benefited the most among the asset classes in QE1 and QE2, we think the positive impacts this time would reduce due to higher price levels now compared with a few years ago, less supportive macroeconomic outlook and deteriorating impacts that quantitative easing would have on the economy and asset prices. Among the commodities under our coverage, we believe precious metals would get the most advantage from QE3. Talks of fiat currency debasement and concerns over inflation would drive demand for safe-haven and inflation hedge and precious metals, especially gold, offer such protection. Meanwhile, with interest rates staying at exceptionally low levels for a longer period of time, the cost of investing in gold is negligible.
Chairman Ben Bernanke announced a number of policy changes to stimulate the US economy. First, he initiated purchases of agency mortgage-backed securities, starting tomorrow at a total of US$23B through the end of the month and then at a rate of US$40B per month for an open-ended period. Buying would continue until the employment market has shown desirable improvement. This program, as we mentioned in our preview would be different from the previous one which had defined a fixed period and amount. The Fed maintained the option to alter the "size, pace and composition of its asset purchases" as appropriate, suggesting the purchase amounts might be adjusted depending on economic conditions. Meanwhile, operation twist will continue through the year-end.
The interest rate guidance was adjusted as policymakers decided to keep the Fed funds rate at 0-0.25% "at least through mid-2015" from previous forecast of "late-2014". More importantly, the Fed stated that it "expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable length of time after the economic recovery strengthens". This is a strong language than previously and indicates the Fed's commitments to leave interest rates at low levels even if the outlook begins to improve.
The SNB and the RBNZ also held meetings last week but both central banks left the monetary decisions unchanged in September. For the coming week, the market focus would return to the Eurozone as the preliminary reading of manufacturing PMI for September would be released. The BOE and the RBA would publish minutes for the September but little surprise is expected.
Crude Oil: Following the ECB's announcement of the new asset purchase program, crude oil prices were pushed higher as the Fed announced QE3. The front-month contract for WTI crude oil broke above 100 at one point on Friday before ending the week at 99.00, up +2.68%. The Brent crude contract stayed firmly above 115 and settled at 116.92, up +2.11% during the week.
Besides central bank quantitative easing, crude oil prices were also lifted by Middle East tensions. The US consulate in Benghazi, Libya, was under attack on September 11 and the US ambassador to the country and 3 colleagues were killed. This, together with demonstrations in Egypt, Tunisia, Sudan, Iran and Yemen due to an anti-Islamic video, raised concerns over oil supply disruption. Although recent data has shown that oil production in Libya has largely returned to pre-civil war level, risks of supply shortage in the OPEC producer should not be eliminated yet, especially the country is undergoing power transition.
Another indicator showing supply concern is that OPEC's spare capacity is expected to drop to 2.21M bpd in this year before recovering to 2.38M bpd in 2013. OPEC's excess supply has fallen below the 10-year average (2001-2011) or 2.66M bpd for the first time since 2008.
Natural Gas: According to the DOE/EIA, natural gas storage increased +27 bcf to 3 429 bcf in the week ended September 7. Stocks were +342 bcf higher than the same period last year and +284 bcf above the 5-year average of 3 145 bcf. Separately, Baker Hughes reported that the number of gas rigs fell -4 units to 448 in the week ended September 13. Oil rigs gained +4 units to 1 413 and miscellaneous rigs stayed unchanged at 3 units and the total number of rigs was unchanged at 1 864 units. Directionally oriented combined oil, gas, and miscellaneous rigs slipped -7 units to 207 units while horizontal rigs decreased -2 units to 1 133 and vertical rigs rose +9 units to 524 during the week.
Precious Metals: Gold recorded gains for the 4th consecutive week as driven by at first ECB's new asset purchases and then by the Fed's QE3 announcement. The yellow metal gained momentum after decisively breaching above the 1700 resistance in early September. The next resistance would be 1792/1804 level. While we expect the positive impacts of QE3 would be less than previous QE measures, precious metals could be an exception as physical demand are of less influence on precious metal prices. Concerns over debasement of fiat currencies and inflation will likely boost investment of precious metals.
PGMs' rally accelerated with platinum and palladium prices gaining +7.35% and +6.80% respectively during the week. Labor actions in South African mines intensified, heightening concerns over the supply outlook. Anglo American Platinum, the world's largest platinum producer, admitted closure of its Rustenburg operations on Wednesday while Impala, the second largest producer, on Tuesday, stated that workers wanted their pay to be raised for a second time this year. Meanwhile, Lonmin, indicated on Monday that only 6% of its shift workers have come back to work, as labor protests continued. Strikes in South African mines raised concerns that the situation would worsen as labor actions to all over the industry in the country