World Equities, U.S. Dollar Pop on More Upbeat Outlook For Energy While Bernanke Says Fed Is Right To Keep Rates Subdued

Can higher energy prices be one of the keys to kick-starting the equities markets? It seems so. At 3 PM in New York, West Texas Intermediate crude is up 1.8%. Part of the uptick in crude, however, was due to an unexpected drawdown in gasoline inventories, which we believe is merely seasonal as many regions switch from summer to winter blends.

We believe the market is reacting to an acknowledgement by Russia that they would meet with OPEC and more specifically with Saudi Arabia to discuss output, pricing and general market manipulations.

Interestingly, insiders on energy trading are saying that it is equities driving oil prices and not the other way around. That seems a bit like Alice In Wonderland thinking to us – i.e., backward and upside down.

“Fuel products are leading the way today though they also seem to be deriving their strength from the broader risk appetite contributed by the equities rally,” said Peter Donovan, a broker at Liquidity Energy, New York.

If we had gotten a major breakthrough in a manufacturing index or something from shipping/transportation, we might incline toward Mr. Donovan’s outlook. But, stock recovery rallies can’t really drive energy prices.

It is noteworthy that crude rose today in spite of a strong U.S. dollar, the currency in which oil is traded.

The ghost of Ben Bernanke rose from the grave today and made a few remarks about current Federal Reserve monetary policy. Most of what Old Ben said was supportive.

“[The Federal Reserve] has a 2 percent inflation target. It needs to get inflation up to that target,” Bernanke said. “Easy money is justified by the need to get inflation up to the target.”

As we have argued in our daily and weekly letters for a long time, Bernanke agrees that the economy cannot stay steady as a two-legged stool.

“The Fed has been using easy money because the economy has needed a lot of support,” he stated emphatically. “A better policy would be a better mix of monetary, fiscal, and other policies. The fact that the Fed is the only game in town means the Fed has to do too much.”

Bernanke also cited low inflation and disinflation as realistic threats. The economy needs more, not less, liquidity. The Fed is at the end of its tether on monetary moves unless it goes to QE$ or negative rates, which are not out of the question.

Hello? Get me Congress on the line…. 

Wishing you as always, good trading,