Keep Selling Until You Are Exhausted

Oil continued to fall Monday as investors did not believe OPEC's 1.5M bpd production last week could stop price decline. The benchmark index tumbled to 61.3, the lowest level never seen in 19 months before recovering to 62.60. Further weakness is expected for 56.9 and 50. In any case the black gold would stage a rebound, upside should be capped below 70.

OPEC's production cut this time was similar to what it did in 1998 and 2001. In the 3 occasions the cuts were done during economic downturns. Both in 1998 and 2001, the cartel failed to restore oil prices. As we mentioned in our previous articles, when economy deteriorates too fast, OPEC is not able to ‘catch up' with it. Therefore, it will need a series of production cut to restore prices to normal level. We believe we are facing the same situation now. OPEC will meet again in December or earlier and another cut will very likely be announced.

It's now hard to say which market is leading the decline as investors around the world are liquidating their high-yield positions in stock, commodity and currency markets. This vicious cycle will continue until all positions are unwound. Asian and European equities plunged on concerns that bailout plans and rate cuts will fail to arrest a global slowdown and sharp decline in corporate earnings. The MSCI AP Index fell 6.9% with Nikkei 225 fell to 26- year. Hong Kong's HSI Index dived to 12.7%. In Europe, all major indices plummeted with FTSE down 4.8%, CAC down 6.5% and DAX down 4.0%.

Gold fell again after briefly rebounded to 740.4 from 681 Friday. Currently trading at 718.3, the yellow metal for December delivery, further downside to 642.2 (100% projection of 1033.9 to 739.8 from 936.3) is expected.

Both investment and physical demands have reduced. According to CFTC, net-long position decreased in the week ended Oct 21. In India, there were fewer customers buying jewelry in the fourth quarter, the historical peak season, as Rupee depreciated a lot this year, making gold more expensive for them.

Dollar's strength fuelled the gold selloff. Relationship between Eurozone to Eastern Europe is detrimental to the single currency. Emerging markets such as Hungary and Ukraine are on the verge of collapse. Belarus also requested $2B loan from IMF. The situation caused Euro to slip to 1.2424 against the greenback. -1.6% from Friday's close at 1.2623. Other currencies such as pound, Aussie, Kiwi and Canadian dollar continued to lose ground.

Except for Japanese yen which rose for more than 2% against the dollar for a second day as risk-averse investors sell higher yielding assets funded with loans in Japan. Yen is now trading at excessive volatility and this is negative for economic and financial stability. We believe the central bank of Japan is ready for intervention. In fact, Australia's central bank has bought the country's currency for a second day.

Interest rate, an important factor determining currency movement, has been actively used to stimulate economic growth and controlling inflation. In the coming FOMC meeting on Oct 29, it's widely expected the FED will cut interest rate by 50 bps to 1% (although the chance of a 75 bps cut has been increased to 31% from 13% a week ago, according to the calculated probability from fed fund futures). If that's the case, the rate would be the lowest since 2004.

We are getting worrisome as the rate approaches zero as it means by then the FED will have one less weapon to influence the economy.