Another 25 basis points rate cut overshadow Oil Prices

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Oct 29 2007
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Oil prices continue to surge but that is not going to stop investors from feeling optimistic about the stock market. At least the expectation from the Federal Reserve to cut interest rate again is high and strong. And this (optimism) is sufficient for the investors to ignore the fact that crude oil futures had soared above $93 a barrel for the first time in overnight trading, after Mexico’s state oil company said it was suspending about a fifth of its oil production due to a storm. This will temporarily halt as much as 600,000 barrels of daily crude production.

The Fed begins its two-day meeting on Tuesday, and the market widely expects a rate reduction the following day after the 50 basis points cut last month (September). While Ben Bernanke’s team remains concerned about inflation it is likely to lower the target federal funds rate by a quarter-point (25 basis points) due to overriding credit worries. Earnings so far have shown weakness in the financial and housing sectors but strength in others.

The likelihood of the central bank in cutting rates again will further boost oil prices but will send more pressure to the US-dollar. I’ve wrote that Ben Bernanke’s team has ample room to play with the interest rate. He has 4.75 percent to toy around and if the new round of 25 basis points cut doesn’t make the investors happy he can continue to cut it in the next meeting. The ball is on his court and it’s up to him to do whatever he thinks will work for U.S. economy.
And to think of the potential of the funds rushing to find parking lots in the rest of the markets including Malaysia stock market, you should start drooling.

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