Morning Fundamentals: Fed Maintains Pace Of Bond Purchases

The latest minutes of the Federal Open Market Committee show that the Federal Reserve will maintain its current pace of $85 billion in bond purchases saying that it “is prepared to increase or reduce the pace of its purchases to maintain appropriate policy accommodation as the outlook for the labor market or inflation changes.” Chairman Bernanke said that the Fed will continue to support policies that will boost employment as 11.7 million Americans remain unemployed after four years of moderate growth. The minutes highlight a shift form the last statement where discussion of a reduction in bond buying has been replaced with the possibility of the expansion of stimulus. The U.S. dollar has weakened against both the euro and the Japanese Yen.

Most economists surveyed by Bloomberg, before the release of the minutes, still believed that the Fed will reduce its monthly buying programme from $85 billion to $50 billion in the fourth quarter as the central bank begins to wind down stimulus. Commentators believe that it is an imperative for policy makers to show confidence in the U.S. economy by slowing the pace of stimulus. At the same time, policy makers will face the challenge of keeping a rein on inflation.

Equity markets suffered heavy losses overnight after a week which saw new record highs achieved. Markets were dragged lower that worse than expected growth in payrolls and manufacturing. Data form the ADP Research Institute showed that companies added the least number of workers since September and more than 30,000 less than consensus expectations. All 10 groups in the S&P 500 fell led by falls in energy and raw materials stocks. The index has closed 0.93% lower at 1,582.70. Earlier in Europe, bourses were mixed with the DAX rising 0.51% while the CAC 40 fell 0.31%.


GOLD fell overnight in response to the possibility that the Federal Reserve may curb stimulus and reduce its bond buying programme. Investors chose to ignore Fed comments that it may also move to increase it stimulus programme if required. Gold traded a $1,440 to $1,473 range. Weak Chinese data also contributed to broad risk aversion across the markets. With the recent rout in gold still fresh in the minds of investors there is enough nervousness to see further weakness in the gold price. However, we remained sidelined. We are not interested in getting burnt by rampant volatility or trying to catch a falling knife. I will remain patient and trade on a technical basis only. We still maintain a bullish bias for gold in the long term. However, given that many of our readers use significant leverage when trading gold, we are now sidelined in terms of any trade recommendations.

Compass Direction
Short-Term Medium-Term
NEUTRAL NEUTRAL
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US Oil (WTI) has suffered heavy falls overnight as the Energy Information Administration released figures which showed the largest weekly gain in stockpiles since such data was recorded in 1982. Inventories now stand at 395.3 million barrels, the highest level of oil inventories in 82 years. WTI traded a range of $90.10 to $93.20. That the price has managed to hold above $90.00 is particularly surprising for us. Especially in light of other data which showed that total fuel consumption dropped 1.4% in the four weeks ending April 26 and demand for gasoline was 1.8% lower than a year ago. Our short positions initiated earlier this week in anticipation of a big rise in inventories this week has worked out well. We now expect an imminent test of $90.00 then $88.00 within the next week. The confounding factor in our forecasts for WTI so far, a massive contraction in the Brent-WTI spread over the past few months, will now play a lesser role in propping up WTI prices.

Compass Direction
Short-Term Medium-Term
BEARISH BEARISH