The primary drivers of the markets today continue to be Europe and commodities, however, we are not seeing the usual weakness.
German Business Confidence came in better than expected and comments from ECB officials suggesting they will do everything possible to hit their inflation target, has the markets beginning to bet on higher European rates.
The potential for a Euro-positive interest rate differential has the EURUSD rate stalled at KEY support of 1.40. The 1.40 level is not only important technically, but also because virtually every person we spoke to this morning is watching this level - oil traders, stock traders, and commodity traders are all pointing to the EURUSD as the market driver today.
Meanwhile, commodities are getting a boost from a bullish Goldman Sachs call to buy oil ,copper and zinc, despite what they are calling a "slowdown" in China. I agree completely with Goldman - a slowdown in China means 8% growth not 9.2%...moreover they expect a re-acceleration in Q3 2011. They also point out the backwardation in Shanghai Copper that we highlighted last week on Fast Money as market proof of real spot demand for copper.
Turning to oil, the German Business Confidence and export data is consistent with a global economy that continues to grow. Additionally we still view commodities and resources to be in a long term bull market, with the potential for an acute shortage of diesel in China.
China has begun to ration electricity to factories in an attempt to curb inflation. The result has been the widespread use of diesel generators in Chinese factories. As evidence of China's thirst for diesel, the government has banned the export in order to bulk up domestic supplies. As the second largest consumer of oil in the world any increase in oil demand should be positive for the entire oil sector.
More specifically, I prefer the refiners that have exposure to the west coast of the United States and have the potential to ship the diesel to China. I mentioned my favorite in the sector on half-time as Valero .
* Brian Kelly is founder Brian Kelly Capital
Trader disclosure: On May 24, 2011, the following stocks and commodities mentioned or intended to be mentioned on CNBC’s "Fast Money" were owned by the "Fast Money" traders;
Accounts Managed by Brian Kelly Capital are long (ANDE)
Accounts Managed by Brian Kelly Capital are long (VLO)
Accounts Managed by Brian Kelly Capital are long (MCP) calls
Accounts Managed by Brian Kelly Capital are long (TLT) Calls
Accounts Managed by Brian Kelly Capital are long Australian Dollars
Accounts Managed by Brian Kelly Capital are long (HOC) calls
Accounts Managed by Brian Kelly Capital are long yen
Disclosures: Accounts managed by Brian Kelly Capital are long VLO and HOC calls
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