Commodities Rally as Weak Housing Market Sustains QE Hopes. China Lifts Fuel Prices

The market focus has quickly shifted from the G-20 meeting to Fed's return to QE again. As the November meeting approaches, investors become more sensitive to comments from officials and dataflow. Commodities strengthened yesterday as the dollar weakened. The front-month contract for WTI crude oil surged to a 1-week high of 83.28 before settling at 82.52, up +1.02%, while that for gasoline and heating oil also climbed modestly. Precious metals rallied. While gold, silver and platinum soared more than +1% to settle at 1338.9, 23.54 and 1697 respectively, PGMs jumped to a 9-year high of 620 before closing at 608.8, up +2.99%.

US' housing market was under the spotlight yesterday. Existing home sales rose +10% m/m to 4.53M in September, following a +7.3% increase in August and beating market forecast of 4.3M. While the stronger-than-expected reading signals the post-tax credit effect is moderating, the level of sales remains low.

Spoke at a housing conference, Fed Chairman Ben Bernanke said that housing markets remain weak and 'high levels of mortgage distress may well persist for some time'. At the same time, Bernanke stressed the government is 'looking intensively at the firms' policies, procedures, and internal controls related to foreclosures and seeking to determine whether systematic weaknesses are leading to improper foreclosures' with preliminary results of the review coming probably next month. Bernanke did not talk about monetary policy yesterday but the market easily related dismal housing markets to further easing measures.

Weakness in USD and speculations for Fed's return to QE has lifted commodity prices. WTI crude oil price has rallied more than +10% since June. Yet, refiners in China, with the biggest ones being Sinopec and Petrochina might not benefit from the increase. Rather, many of them suffered as fuel prices are under Government controls.

The NDRC yesterday announced to increase retail gasoline and diesel prices by +3%, the first adjustment since June and the first hike since April. Since the new mechanism - price adjustment will be made should international oil benchmarks fluctuate by more than 4% over 22 working days- was introduced in December 2008, only 12 adjustments were made. The moves were not enough to relieve Chinese refiners from margin squeeze as international oil prices have rallied significantly during the period.

Xinhua news agency reported that the NDRC will release a 'more transparent' oil product pricing mechanism by the end of this year. It's expected, under the new mechanism, fuel prices will be adjusted when international oil prices change 2% in 10 working days. The move would be positive to refiners as domestic fuel prices will move more coherently with international prices.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

Other Topics