Can 'Rate Cut Band-Aid' Heal The Bad Days?

Oil price rose today building on the rallies of US and Asian stock markets. Also, comments by OPEC member on another probable cut as well as IEA's forecast on annual production spurred buying. WTI crude oil for December delivery gained 2.7% in European morning to trade at 64.42. The benchmark contract traded at 66.71 the highest earlier. We believe the black gold's rebound from 61.3 is temporary as the main trend is still on the downside given world economy is yet to recover. $69/70 level should cap upside.

Equity markets have been viewed as a proxy to oil demand and hence oil price recently. Today, Asian stocks extended the strong performance of US market on speculation that Japan and US will cut interest rates. The MSCI Asia Pacific Index added 3.7% to 80.64 after the 3.4% rise a day ago. In European morning, FTSE and CAC added 4.7% and 6.4% respectively but DAX lost 1.7% after gaining 11% yesterday as Volkswagen doubled.

OPEC announced a production cut of 1.5M bpd last Friday in order to curb oil price from nose-diving further. The members are watching closely this week to see if the prices stabilized after the cut. They do not rule out the possibility of further reduction if the condition is still not in control.

Financial Times today cited a report from IEA that the natural annual rate of output decline is 9.1%. Even with investment in oil fields, the rate would still be a decline of 6.4%. This suggested that the world producers can hardly satisfy long-term demand. Although the findings may be true in the long term, deteriorating demand in coming 1-2 years should continue dragging down oil price in near term.

Later today, we will see US Energy Department's petroleum inventory report. According to Bloomberg survey, analysts forecast crude, gasoline and distillate stockpiles built by 1.55 mmb, 1.5 mmb and 1.05mmb, respectively, for the week end on Oct 25. Should there be any higher-than-expected numbers, we would see selling pressure in oil.

Gold continue to gain today on dollar's weakness. Currently trading at 747.8, the benchmark contract has increased 10% from the bottom at 681 formed last week. We view recent rebound as a retracement of the decline from 936.8 and set first target at 778.5.

The dollar index fell for the first day in four as the euro rebounded from its weakest level since April 2006 and the pound reversed a seven-day decline. FOMC meeting is scheduled to announce its rate decision later today. While market has already factored in a 50 bps cut to 1%, the Fed Fund futures showed a 38% chance that the rate will be reduced by 75 bps.

Over the past 13 months, the FED has cut the benchmark rate from 5.25% to 1.5%. Accompanied with other lending programs, the government has injected over $1 trillion in the financial system. However, banks are still reluctant to lend to each other.

Although it's expected another round of 'coordinated rate cut' will follow by the end of next week, with Japan joining the crew, global economy is still poor and uncertain. Confidence is so fragile that all kinds of economic activities are sluggish. Moreover, after the today's cut, interest rate in US will fall to 1% or below. That means FED will only have 4 or less chances to adjust the market using this tool. What's next?

Given the severe recession we are facing, it would be wise to use current rebound to sell your holdings- for profit taking or loss cutting. We are not at the bottom yet.