Likely China rate cut lift markets spirit: Fat Prophets

The story that it is a central bank stimulus that is driving many of the asset markets is being repeated by a lot of traders. The European Central Bank (ECB) which meets this Thursday is expected to cut interest rates to boost the euro zone economy. Unconfirmed reports that China would again look to lower its reserve ratios and possibly cut its interest rates, have also been doing the rounds

David Lennox, analyst, Fat Prophets talks to CNBC-TV18 about what the market is expecting in the near-term amidst all these global data points which need to be considered. Below is an edited transcript of his interview. Watch the accompanying video for more. Q: Copper hit a six week high. Brent crude was at over USD 100 per barrel on an intraday basis. What led this commodity rally? Was it just a catch up post the EU summit and maybe optimism ahead of the ECB meet?
A: We certainly think that the EU summit probably did give some respite to investors in terms of what’s been happening in the EU over sometime now. They somewhat did say that they would start to put a supervisory level over the banking system on a broader zone level which certainly did give investors that comfort that they were looking for.
However, when you look at specific data, it is probably not quite enough we think in terms of how the problems are still going to be overcome in the EU which may have pushed the risk-on trade that we have seen over the last couple of days so hard. Q: Give us a sense in terms particular cues for last night?
A: We certainly think that last night was more a cry from investor looking towards quantitative easing programs coming back into play. There was I think an unofficial announcement by a newspaper suggesting that China would again look to lower its reserve ratios and possibly cut its interest rates. That would be a very good stimulus certainly for commodities and we think that investors have taken with certainty that story to heart and that’s what pushed the prices of commodities so hard. Q: The ECB stimulus is expected on Thursday. BOE could be buying more securities and therefore creating a little bit more liquidity in the banking system. Now the Chinese central bank perhaps will also pitch in with reserve requirement cuts. But how much can this run? After these announcements are made, do you think the rally will have legs or will this just be a one day or one week wonder?
A: We have certainly seen a lot of false tones in terms of the prices starting to push up higher and then we have seen negativity return. It is difficult given the period of time that we have now being in such economic turmoil around the globe to I guess see a way clearer into the future where we will see a more concerted gain in prices going forward.
We do think that probably we are again seeing another false tone because we haven’t at this point really seen any concrete steps to specifically fix the problems that have occurred in the EU. China on the other hand is slightly different. They haven’t got any significant economic problems.
So if there is a change in a policy and easing as such, it will very quickly flow through to the broader economy and we think that’s probably where investors are seeking some heart in terms of what China may do. Q: Will you sell Brent at USD 100-101 per barrel?
A: We have at this point in time somewhat of a bear on the crude pricing and that has worked out to that way. Unfortunately, we have seen over the last couple of days a step-up in the activities in terms of the Iran situation and the sanctions that have now been applied to that particular country.
We do believe that when investors saw Iran test firing missiles, that was an indicator that that situation has not gone away and suddenly oil was priced risk in again and that’s really probably the main driver of the oil price rise. There has been no other change in terms of the demand side that we can see. It’s really that specific risk-on situation regarding Iran. Q: If you had to actually make a bet in terms of your top commodity in terms of the further upside at these current levels which one would it be and consequently which would be your top sell in terms of a possible downside?
A: We would be looking to gold at this particular point in time. We do think that as the chorus of voices towards further quantitative easing does grow that will have an impact on the price of gold. Certainly, if the indications that we have seen out of the US have suggested to us that the chance of the Federal Bank introducing a program other than just Operation Twist is probably starting to become more imminent and if that’s the case then we would be suggesting gold would be the place to invest.
On the short side, I am a resource analyst and I generally don’t likely on shorting resources but we still think that oil probably at USD 100 per barrel would certainly be one of the key shorts that we would be looking to provided there are no further risk assessments coming out of the Iran situation.