The Fed started proceedings with a 50 point cut last week, followed early this week by the RBA with a 75 point cut.  Today, the ECB will chime in with 50 points and an hour later the BOE will deliver. The BOE may even go 1%.

The last time the BOE moved cash rates by 1% (as a consequence of the economy), was in the early 1970’s.  All is not well in the UK and that’s an understatement. 

In our last review of ConocoPhillips (NYSE:COP), we took the opportunity to reduce our exposure to the company. This was primarily due to a diminishing risk reward profile following the stock’s price gains and the outlook for generally flat production. Given that the stock price has since pulled back considerably, however, the risk reward profile is beginning to look more favorable.

This week we review the company’s third quarter production report and consider whether the time has come to increase our exposure.

Over recent weeks, extreme currency movements have been the main theme of financial markets. The currencies of the world’s two largest economies, the US dollar and the Japanese yen, have been beacons of light. In just the last three months or so, every other major currency has declined sharply against the dollar and the yen.

Deleveraging’ is the simple answer to why these two currencies are displaying unparalleled strength. However, we need to go much further back to really understand these recent violent currency moves. Firstly, let’s look at the extent of the dollar and yen’s appreciation against the world’s major currencies.

All data as of Friday, October 24

In the current market environment, a week seems like a year. So much is happening on a daily basis it can be difficult to see the wood for the trees. This week, we try and untangle the web of information and examine what this means for equity markets.

The past week has been a terrible one for gold investors. While the recent volatility has been unprecedented, investors who have been on the gold trade for a number of years will not be altogether surprised. We believe the recent weakness in gold and the volatility in gold stocks is being driven by a brewing currency upheaval. We will address the issue of the US strength in next week’s report.

The chart below shows the ratio of gold stocks to gold, and shows that gold miners are now as cheap, relative to gold, as they have been in years. We do not expect this situation to persist in the long term.

In our most recent report on gold we recommended accumulating some of the larger gold miners (Newcrest Mining (NCMGY.PK), LGL Group, Newmont Mining (NEM)). Big gold producers are incredibly cheap and given the weakness in the Aussie dollar (and rising Aussie dollar gold price) and pullback in energy prices, profitability should begin improving while most other companies' margins will come under pressure.

However, recent developments in the gold market point to the potential for near term volatility that Members should be aware of.

At this point in time, we still believe that last Friday the 10th of October was a climax white eye day, which means that the market will struggle to break those lows.

However, this view is not tradeable just yet, and requires a passage of time to pass before the probability increases. At the moment, the bulls and bears are fighting hard and the ranges are massive. Only after the ranges contract do the risk reward payoffs come back into line and signal a time to trade.

Whilst walking away from a full bid for the world’s third-biggest platinum miner, Lonmin (LNMIY.PK), at this stage, Xstrata (XSRAF.PK) has simultaneously boosted its stake in the company to 25%, effectively blocking other bidders from gaining control of the company. We fully expect Xstrata to return, however the recent turmoil in financial markets gives the company the perfect excuse to cool its heels.

Our last review of this stock was in August (Fat Euro Mining 82).

Today’s commentary concerns the last carry trade left in the markets, i.e. gold.  Gold peaked at $1032 in March this year; however, since then it has fallen steadily, trading as low as $734.  While this fall has been in line with a rising USD dollar, it has also been orchestrated. 

Gold has been falling in an environment of rising inflation and rising uncertainty, and I've spoken in the past about gold de-coupling from the USD correlation one day.

Over a week ago, Congress passed the $700 billion rescue package designed to unlock the credit markets. Because modern day politics is what it is, an additional $150 billion in relatively benign sweeteners was added to the package to secure approval. The increase in the FDIC’s guarantee to $250,000 from $100,000 was particularly well received.

Investors however were unimpressed and global equity markets continued to slide. Although Black Monday’s are becoming commonplace of late, yesterday the Dow Jones showed no favoritism and had its biggest one day percentage fall since the 1987 crash.

The two lubricants of global economic growth have had a rough time of it as of late. Credit, the first of these, is remaining stubbornly frozen despite the best efforts of governments and central bankers around the world. This situation is in turn exasperating the recessionary outlook the world was already facing, and in the process magnifying the correction in price of the second, oil.

This has had an adverse impact on all oil & gas producers regardless of their quality. However, we view the correction as overdone and disconnected from the fundamental story supporting higher prices. We believe in time these factors will begin to re-assert themselves and high quality participants, such as Norway’s StatoilHydro (NYSE: STO), will benefit.

With the US in meltdown every journalist has an opinion. They quote tired facts and sensationalize the landscape. This type of press coverage is an anecdote, an anecdote for a short term bottom.

In the last year, the US government has cut interest rates 3%, injected billions of free money into the money market, bailed out some and let others fail, intervened in the dollar and still the rot continues.