Commodities Rebound Strongly on Irish Bailout. Outlook Mixed

ONG Focus | Insights | Written by Oil N' Gold | Thu Nov 18 10 07:50 ET

Commodities rebounded strongly in European session as dollar's retreat raised demand for risky assets. Currently trading at 81.8, the front-month contract for WTI crude oil price rose for the first time in 5 days. Price had surged to 88.63 on November 11 before slumping to 1-month low of 80.6 yesterday. Similarly, gold also jumped to as high as 1358.2 after being pressured over the past 4 days.

Irish central bank Governor Patrick Honohan said the country will 'absolutely' ask for bailout from EU/IMF. The loan will be as 'substantial' as 'tens of billions' of euro as 'the purpose of the amount to be advanced, or to be made available, is to show Ireland has sufficient firepower to deal with any concerns of the market'. The euro as well as other currencies rebounded against the dollar after the news amid expectations the bailout may avoid contagion to other peripherals. Meanwhile, Spain sold 2.59B euro of 10-year bonds and 1.07B euro of 30-year bonds, both at low yields than similar traded securities. Investors turned more confident as Ireland will likely seek financial assistance.
While the bailout may lift optimism in the near-term, whether the debt crisis in the Eruozone is solved remains uncertain. Look at Greece. The country finds it difficult to achieve its target on deficit reduction after tapping funds from EU/IMF earlier this year. Austrian Finance Minister Josef Proell threatened that he might withhold his country's share of the rescue package because Greece's failure to achieve its goals. Indeed, after Ireland is bailed out, market's focus will turn to Portugal and Spain. Ongoing sovereign woes in the Eurozone should threaten market confidence.

Fed's QE2 has recently driven heated debate. While it has received lots of criticism from economists and finance officials, the OECD said today that the central bank should 'continue to support growth, as inflation remains well contained and the economy continues to run well below capacity'. In addition to keeping policy interest rates broadly unchanged in 2011, the Fed could also 'reaffirm its commitment to price stability by adopting an explicit medium-term inflation target. If growth turns out to be significantly weaker than projected, action to lower real long-term rates via further quantitative easing would be justified, notwithstanding uncertainties associated with the use of such unconventional policy tools'.

In its latest global economic outlook, the OECD revised down the world's GDP forecasts to +4.2% for 2011 from +4.5% projected in May. Among OECD economies, total growth will be +2.3% in 2011. Growth in the US was revised the most significantly to +2.7% in 2011 from +3.2% in May's estimate.

 

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