Short-term Gain, Long-term Pain - Is That The Result For Worldwide Bailout Plans?

Oil price resumed recent decline after brief rebound to 84.83 yesterday as investors believed that worldwide bailout plans would not be adequate to prevent economy from slowing down. Trading at 77.84, the benchmark futures for crude oil extended the 3.2% selloff last night and further weakness to 75.00 is likely.

President Bush announced Tuesday that the U.S. would allocate $250 billion out of a $700 billion bailout buying stock in private banks. Government in other parts of the world also pledged to save financial institutions in their countries. Nonetheless, investors doubted that while the bailout may save the banks, economies are not able to escape from recession. Companies have just started laying off and there are more rounds to go. Consumer confidence is dropping.

Both Asian and European stock markets retreated after 2 days' rally. MSCI Asia Pacific Index decreased 1.3%. FTSE 100 index fell 3.35% in European morning while both CAC 40 and DAX fell by more than 2.5%. Investors are saddened by Janet Yellen's, Federal Reserve Bank of San Francisco, message that the US is already in a recession.

OPEC members will meet together on November 18 to discuss about production cut. It's expected that they will reduce oil production by 1M bbls/ day, which is about 3% of the cartel's current daily output. The group has been concerned about the falling of oil price from 147.27 in March to below 80 since last week. Announcement of a cut may stabilize price decline from a short period of time but in the longer term, sharp reduction in demand would more than offset the reduction in supply.

The market is waiting for EIA's inventory report which is to be released at 1030 EST today. According to Bloomberg survey, crude oil stockpiles last week increased by 2.6 mmb, gasoline by 3mmb which distillate by 0.5 mmb. Builds of inventories are normally viewed negative by the market.

Gold continued to edge higher from 824.5 from last Friday. Volatility this week is significantly less than previous weeks, probably because investors are digesting how much the rescues plans would help global economy. For the rest of the week, the precious metal is likely continue to gyrate within the broad trading range from 822.5 to 936.3.

Meriill Lynch is bullish on gold on the ground that global plans to rescue the financial industry are set to increase inflation pressures and will raise Gold prices to the $1,500 level.

While capital injection by the governments may boost sentiment in near term, a much longer period of time is needed to recover the economy. In fact, what the governments are doing are negative for property markets. The CDS market has contracted to USD 50 trillion from USD 63 trillion. As CDS are not guaranteed by governments as bank deposits did, it's expected more institutions would dump their CDS investments in favor of bank deposits.

World economy (especially for US and Europe) in coming years may follow the footsteps of Japan in the 90s. although DJIA rebound strongly after finding bottom at 7880, outlook is still bearish. However, with government intervention, panic selling like last week would not repeat. Therefore, a long period of fluctuation is likely to be seen.