I guess we can talk about the cold but I think it's already talking for itself. Heating degree days are piling up in the energy complex but to get the full picture on this New Year surge of bullishness, you really have to look beyond your frost-bit nose. It is not so much the transitory issue that we are freezing that inspired the big move but a growing sense that interest rates will be frozen for a longer time than the market anticipated. You see, weather was a major factor that drove oil and heating fuels and orange juice yet other markets like gold and silver and copper soared as well. Ok, I know some people think gold can keep you warm at night but this rally was about more than just weather. This was about the changing attitudes of when the Fed will raise rates and the resumption of the dollar carry trade that helped drive last year Fed inspired commodity rally.
The dollar got whacked in the aftermath of weekend comments by Fed Chairman Ben Bernanke on his talk of an aggressive exit strategy. The markets seemed to not take his comment seriously or at least they had the perception that rates may stay lower longer than they thought. This perception grew stronger when Federal Reserve Board Governor Elizabeth Duke said she sees inflation remaining subdued. Fed Fund futures rallied, lowering expectations of an interest rate hike in June to a mere 58% chance, down from 78% chance at the close last week. This significant change and could have a significant impact on commodity prices. And what made this more bullish was this came in the back drop of some impressive numbers in manufacturing in both China and the United States. The ISM manufacturing number blew away expectations posting a 55.9% percent reading which the best was since 2006. This fuelled the expectations that the economy was recovering faster than some thought. Now couple that with the lowered expectations of Fed tightening and you has the perfect recipe for dollar carry trade inspired rally. Oh sure, the cold helped and reports of a dispute in oil and gas between Russia and Belarus but when those issues pass and the cold front breaks, it will be the fed and the dollar that will have the biggest influence on price.
And the cold is not just here it is in China and Europe. Dow Jones reports that authorities are warning of potential power shortages as some areas in China continued to struggle with some of the coldest weather in decades. Dow Jones says that in the central city of Wuhan, a major industrial hub, officials said they were restricting electricity usage while several provinces reported that stockpiles for electricity-generating coal were down further from already low levels after an earlier cold snap in November. Beijing faced the coldest weather in half a century on Tuesday as its residents dug out from the worst snowfall in even a longer period of time. The weather forced schools, airports, roads and railroads to close on Monday. With the snow clearing, services were gradually being restored to normal.
Republished with permission from Alaron's Energy Report Daily.