Against the Grain

The lack of political leadership in the US is helping to fan the uncertainty we doubt there could have been a worse time for the world’s economic locomotive driver to make a shift change. We would not be surprised to hear calls for the inauguration to be brought forward. For the second session in succession US equities gave up substantial ground in the last hour as investors worried about the banks and legislators rejected pleas from the US motor industry for financial assistance (the DJI fell 5%). Bloomberg reports the Obama transition team is exploring pre packaged bankruptcy for automakers as a possible solution to the industry’s problems and a means of avoiding government cash. This is an idea put forward by a Republican senator and rejected by Democrats in Congress.

The falls in the US were absorbed by Asia, the US$ was steady, oil weakened and metals followed. The ICSG released their Aug world cu supply / demand balance indicating a 125 kt surplus however in this fast moving environment the data is history. The weekly Shanghai stocks saw cu fall 3797 tonnes to 17,699; al rose 3411 tonnes at 202,156 and zn down 2428 tonnes at 69,569. In Europe there was a poor set of Nov flash PMI data, French manufacturing PMI was 37.9 (Oct 40.6) and service 46.6 (47.5); Germany manufacturing 36.7 (42.9) and service 46.2 (48.3) and Euroland manufacturing 36.2 (41.1), service 43.3 (45.8) and composite 39.7 (43.6). The LME stocks saw metal into all the metals except small declines in pb and sn. On the week cu rose 9 kt; al leapt 123 kt; zn up 4 kt; pb fell 3 kt; ni increased 2046 tonnes and sn saw 900 tonnes in. Just after LME stocks the US$ weakened sending the metals higher as it became the lightening rod, there is a news report in Asia that the US has approached Saudi Arabia, UAE, Qatar and Kuwait for US$ 300 billion in financial aid to help in its efforts to stabilise the economy. Support for the metals also came from a recovery in the mining shares over the past two day with investors said to be viewing the sector as undervalued.

The excitement in the first pb ring saw tom / next boom out to 300 back later adjusted by the LME to level. Ahead of the US opening the metals jumped ship tying themselves to the US equities as opening calls looked for an early jump in the DJI and associates. With no data it will become a case of following the leader with some end of week short covering. The winner of the day is gold trading at 795 as investors revert to the oldest store of wealth in troubled times at the same time the US$ surged through € 1.250 and economists talk of US rates going to 0%. The markets are acting like a tipping tank of water one moment buyers are swarming then the next sellers hit back. While gold has moved higher all day oil has fallen away. Late in the day Rio Tinto said it had cut al output at its UK Lynemouth smelter (180 ktpa) by a third over the winter.

A week when things scattered in every direction, metals all down cu 279, al 75, zn 20, pb 167, ni 1100, sn 2400, gold up US$ 46 / oz, oil fell US$ 8 / bbl, DJI down 912 points, US 10 year bonds fell 0.49% just above its record low y/day and US$ strengthened with the yen.

Deflation is the new nemesis on the block and this was elevated by the big drop in US CPI and a further Fed downgrade of US economic growth going forward (’08 growth was downgraded to 0% - 0.3% from Jne 1% - 1.6% and ’09 -0.2% - 1.1% from 2.0% - 2.8%). The US equities reacted to this with a large fall in the last hour of trading sending the DJI off 5%and below 5000 points for the first time since ’03. The sell off carried on in Asia as the Nikkei lost nearly 7%, Hang Sang 6% and ASX 4%.

The metals were marked lower but certainly not with the same intensity as equities as the US$ was steady. The Taiwanese Q3 GDP contracted -1% (Q2 +4.5%). In Asia the ’09 Codelco cu premium for China was announced at US$ 75 / tonne cif (’08 US$ 115 / tonne cif). That adds to Japan US$ 65 from 102, South Korea US$ 64 from 99 and Taiwan US$ 70 / tonne cif from US$ 102. Bloomberg reported Chinese pb smelters are idling plant as demand falls with battery makers facing pressure from high priced stocks. While Xinling Refining Co has cut 60% of its 100 kt smelting capacity, battery producer Yuasa in China has halved output. The LME stocks reflected the economic mood as apart from pb the material pours in to the obvious places, cu and al global, ni Rott, zn Asia, sn Sing while pb out of various US and European locations. The talk in zn is the fate of the OZ Minerals flagship Century mine (500 ktpa) in Queensland with analysts predicting present prices will see the mine reduce output anywhere from 20% to total closure. One of the things that is complicating attempts to estimate the cut off level of cash cost for mines and smelters is the rapid fall in input prices. For instance JP Morgan sees in the al industry lower inputs and higher US$ lowering the industry average cost of production by as much as 20% to around US$ 1600 / tonne. The Oct German PPI was unmoved (Spt +0.3%) as yoy fell to 7.8% (8.3%). The Oct UK retail sales fell 0.1% much less than expected (Spt -0.5%) while yoy was up 1.9% (+1.8%). The IAI reported Oct daily average primary al output at 70.7 kt (Spt 70.3 kt and Oct ’07 68.9 kt).

The US weekly jobless claims rose 27 k to 542 k against an expected decline. With weaker equities in Asia and Europe the market is expecting the worst when the US begins. As we noted y/day there was a notable collective “throwing in of the towel” by markets mid pm London time. At 15:00 the Nov Philadelphia Fed manufacturing index slipped to -39.3 from -37.5 with the fall cushioned by a significant fall in prices received and less inventories. The Oct Conference Board leading economic indicators fell 0.8% to 99.6 (Spt +0.1%), the coincident index up 0.2% at 105.6 and lagging index increased 0.1% to 113.5. Markets ebbed and flowed with the DJI, notable exceptions zn (traders caught short), gold (safe haven buying) and US 10 year treasuries (flight to quality).

First it was the financial sector looking to socialise their losses now it looks as though everyone is joining in, with reports the car industry in the US, UK and China are in various stages of requests as trade deteriorates. The Nov US NAHB housing market index was 9 the lowest since the series was created in ’85 (Oct 14) and the accompanying statement called for “Congress and Administration need to focus on stabilising housing”.

The markets continued to consolidate overnight further racketing down volatility though many will think we are in some eye of the multiple storms. The US weekly ABC / Washington Post consumer sentiment index was -52 touching the record low after -50 last week. The al (US 60,800 tonnes, Korea 7975, Johore 7075 and Trieste 3375) continues to cascade into LME warehouse dominating the now familiar pattern to the data. This is how things have changed since late Aug when al was trading 2776 and stocks stood at 1,168,125 tonnes and cu was trading 7665 with stocks at 178,180 tonnes since then al has fallen 32% in price and stocks risen 45% while the cu price is off 51% and stocks up 57% - we guess back then a lot of people knew the al was around while cu they thought it was all being used in a booming emerging market. The past few days have seen a number of public sector strikes in Chile as unions push for wage increases. Another small cu miner has curtailed operations Weatherly International will close mines in Namibia although its custom smelter (34kt) produces blister from imported concentrates (Bulgaria and Peru).

The Oct US CPI dropped 1% the largest fall since records began in 1947 as energy prices slumped 8.6% (Spt 0%) and core inflation fell 0.1% (+0.1%). The worries the NAHB signalled above where highlighted by Oct data, housing starts fell 4.5% to 791 k units annually the lowest level since ’59 (Spt -6.3% at 817 k units) and building permits dropped 12% to 708 k units per annum (-6.1% at 805 k units). This data saw us back into a US$ play, as it weakened gold, oil and metals rose the US$ and equities reversed as did everything else. Every so often the market is hit by a wave of growth worries and that occurred late today sending the DJI off 200 points, the S&P to a 5 year low; 10 year US bond yields 30 basis points in yield. Why this afternoon the catalyst seemed to be another rise in US oil stocks.

We believed three key factors will signal the recovery of the world economy; to what extent the financial woes debilitate the broader economy; the impact of government and central bank fiscal and monetary policy actions and lower “food / fuel” inflation. On the first the slowdown has hits with sharp focus on rising unemployment, falling retail sales and declining output sending many countries into official recession. Going forward it is what happens after this initial shock that is important. The public sector response has been aggressive and broad in nature with time needed to judge its impact. The convention is that official rate cuts take upwards of nine months to have their full impact while fiscal stimuli are often big in headline and less impressive on examination. What is indisputable is that inflation is set to fall rapidly easing cost push pressures.

It seems all markets are now correlated to moves in the US currency and its equities and until we get a better idea of what the new US administration’s policies are this state of limbo looks set to continue – the world’s locomotive driver is having a tea break and those onboard must wait. The DJI gave up its impressive Thurs 6% gain in two sessions and its quite eerie how other things mirrored the moves. China added cu tube to goods eligible for an export VAT rebate from Dec 1. The LME metal stocks have established an on going pattern with inflows of al (Sing 3275, Antwerp 2175 and US 1800); cu (Livorno 2500) and ni Rott 228) dominating; pb saw cancelled European going to the Far East (Livorno 1350). No surprise Oct UK inflation data reflected the significant fall in “food and fuel”, CPI fell 0.2% (Spt +0.5%) yoy 4.5% (5.2%) and RPI -0.3% (+0.6%) and yoy 4.2% (5%). On the metal front the world’s largest zn producer and custom smelter operator Nyrstar said it was cutting output from its Belgian and Dutch smelters by 28% not sure what that is on overall production which in the 9 months to Spt this year was up 2% at 800 kt.

US Oct PPI tumbled 2.8% dominated by a 12.8% fall in energy (Spt -0.4%) and core PPI rose 0.4% (+0.4%). A reminder of ever present risk, someone pointed out to us that the Saudi VLCC pirated y/day was 480 miles off the Somali coast carried 2 million barrels of oil (25% of Saudi daily output) valued at US$ 100 million in a vessel weighting over 300 kt. It caused little reaction in the oil market. The audacity of the action stunned the US naval commander in the area. One has to hope the pirates do not cause an environmental threat. Makes the 33 T-72 tanks seized in Spt look a small bag, not sure what has happened to them? In early US trading equities went bid on better results, the US$ weakened and oil up resulting in metals off their lows. In Oct China overtook Japan as the largest holder of US Treasury government debt at US$ 585 trillion against US$ 573 trillion respectively. In the afternoon the metals tracked the path of US equities.