All Of Oil, Gold and Stocks Are Up, Another Dead Cat Bounce?

Oil continued to recover from low formed at 68.75 last Thursday as equity markets stabilized, USD retreated and OPEC is expected to cut oil production aggressively in the Oct 24 meeting. Currently trading at 73.66, the benchmark contract rebounded by more than 7%. However, as demand outlook remained sluggish, we believe upside would be capped below 77.09 and yield another fall.

Crude oil price has been on track with stock market movement recently. Today, both Asian and European stocks advanced. In Asia, the South Korean Government guaranteed US$100B of foreign-currency debts and agreed to provide US$30B to banks. The government would also provide tax benefits for long-term equity investors. Such a huge rescue plan in Asia boosted MSCI AP Index by 3.6% to 90.44. Specifically, Nikkei 225 index rose 3.6% while Kospi gained 2.3%. European markets also rose by around 1% at open.

OPEC will be meeting in Vienna on Oct 24 to discuss the impact of global economic slowdown on oil price. While there's a consensus that oil production will be cut, there's no agreement on the amount. Market expectation varies from 1M to 2M bpd. There are 2 camps in the cartel holding different views. Venezuela and Iran want to have production cut as they rely on energy sales for more than 50% of their revenue. However, Saudi Arabia does not think a cut is necessary. The biggest oil supplier in the world explicitly said after the September meeting that they would continue to supply sufficient crude oil as and when consumers needed.

Historically, crude oil price advanced a few days before and after a production cut but the rises were short-lived. During 2003-2007, oil price surged even after OPEC announced production INCREASES as the market treated it as a signal of less spare capacity. Let's see how the market reacts after OPEC announcement after the meeting this time.

Gold price also picked up and traded above $800/oz again today. Currently trading at 804.6, gold for December delivery rose to as high as 811.3 in Asian session. Although this represented a 5%, or $40, gain from the low formed last week, previous support 822.5 now act as strong resistance and only firm break of which would made our view towards the precious metal bullish again. Otherwise, another decline would be seen for 750 and then 739.8.

In this volatile and unpredictable market, it's hard to tell whether today's rise sustainable or not. However, Bernanke's testimony today (10 am EST) before the House Budget Committee, which involves forecasts of US and world economy, may offer some insight on interest rate, USD and commodity prices. Looking at the current situation, the FED chairman probably would present dovish statements on interest rates as the economy is yet to turnaround.

Germany released a better-than-expected PPI for September at +8.3% YoY, higher than the 8.1% gain recorded in August and also more than 7.6% increase expected by economists. On a monthly basis, the PPI rose 0.3% in September, picking up from a 0.6% fall seen in August, while economists had predicted a 0.4% fall. In light of the news, as well as rate cut expectations, USD sank to 1.3483 against Euro. USD Index also retreated a bit to lower end of $82.

Last week, one of the reasons for dollar's strength was the flight to Treasury as investors seek the 'safest' investment. Today, we see that Treasury fell significantly as investors redeployed capitals to stock markets again. This is likely another reason for the dollar's pullback and gold's recovery before US opening.