Markets Respond As Expected to QE3 -- Commodities and Stocks Up; the Dollar Down

September 14, 2012 02:53 AM

What Traders are Talking About:

* QE3 bearish for the dollar, bullish for commodities. The Fed launched a third round of quantitative easing following the Federal Open Market Committee meeting yesterday by announcing it will purchase $40 billion in mortgage-backed securities each month for an unspecified amount of time. Combined with already existing policies, the Fed will increase its holding of longer-term securities by around $85 billion per month through the end of the year. In the post-meeting press conference, Fed Chairman Ben Bernanke said the Fed is ready to pull out all stops to revive the housing and jobs markets, which are needed to strengthen the economy. But Bernanke acknowledge the Fed can't to it alone, saying they don't have enough firepower if the so-called "fiscal cliff" comes into play at year-end. Basically, Bernanke took the opportunity to call out Congress.

The long and short of it: As expected, the dollar responded negatively, while commodities (led by gold and silver) and the stock market rallied. Stock markets in Asia and Europe also responded positively overnight. So... whether the Fed's plan works or not, it boosted investor confidence, especially coming on the heels of the European Central Bank stimulus package.

* QE3 bullish for grains, but fundamentals remain the key. Because QE3 is bullish for commodities and bearish for the dollar, it's supportive for grain and soy futures. But most of traders' focus in the grain and soy complex will remain on supply and demand fundamentals. Tight stocks and the level of end-user buying mean MUCH more to the price outlook than any actions by the Fed. Any boost from QE3 will come from speculative investors who may now be more apt to take on greater risk. Longer-term, the inflationary implications of QE3 are also bullish for grain and soy futures -- and other commodities. Before inflation kicks in, however, there must be some velocity behind all of the money the Fed is pumping into the economy. Monetary velocity is currently lacking, which is keeping inflation low.

The long and short of it: Many traders will give QE3 way too much credit if grain and soy futures rally now. The primary price driver will remain market fundamentals.

* August crush well below expectations. August soybean crush totaled 124.8 million bu., according to data from NOPA members. That's well below expectations for crush of 128.3 million bu. and down 9.2% from July. But the crush pace was still 5.1% above year-ago last month. With the crush pace coming in well below expectations, soyoil stocks also slipped below expected levels at 2.168 billion pounds. Meal exports remained very strong at 613,196 short tons last month.

The long and short of it: Soybean futures have eased from earlier highs on the disappointing NOPA crush data, but remain solidly higher as demand -- both domestic and export -- remains strong overall despite historic prices.



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