Against the Grain

The shock House of Representatives rejection (never has there been a better example of the US leaders being so out of touch with the electorate) of the Troubled Asset Relief Programme decimated equity markets before a new mood of optimism settled in as the market believes they WILL pass it next time, wont they? The twists and turns are driving markets down bone shuddering pits before crawling back out. Fundamentals and technicals mean little in this sentiment of fear, however what is becoming evident is Congressmen are listening to the electorate who oppose the bail out and Washington must manufacture a pill voters are prepared to swallow. The complicating factor is all the Congress and half the Senate face the electorate in a month and therefore there is little time for them to forget which way their representatives voted on such an important issue. Basically there is not time for things to heal!

With Shanghai closed the metals came under more sustained selling in early London with cu as low as 6170. In Japan Aug industrial output declined 3.5% yoy, unemployment rose to 4.2% (4.1%) and household spending fell 4% yoy. The metals had some fundamental support as workers at Xstrata’s Kidd Creek operations (cu 125 kt and zn 138 ktpa) in Ontario broke off labour talks. The LME stocks saw rises in al and ni. The Aug German unemployment rate was unchanged at 7.6%. The final UK Q2 GDP was +1.5% (+1.4%). Markets steadied in Europe as expectations grew that the US Congress would vote the right way later in the week, this supported the US$ as the € came under considerable pressure as more banks this side of the pond sought nationalisation.

In the US the Jul Case Shiller home price index declined 1.1%, yoy -16.5% (Jne -15.9%). Then the September Conference Board consumer sentiment index improved to 58.9 (Aug revised to 58.5 from 56.9) however before the latest markets shudder. This type of data will indicate how Main Street reacts to Wall Street tremors. The Spt Chicago manufacturing PMI was 56.7 better than expected (Aug 57.9).

The news from Washington is that Congress and the Administration has reached a deal on the bail out however that has been the news since Thurs and as yet there is still nothing in concrete, with the sword of catastrophe hanging over failure. The lancing of the banking boils continued on a broad front, the UK nationalised mortgage lender Bradford & Bingley set to be nationalized later today, Germany saw a rescue of Hypo Real Estate, a bank specializing in financing property deals. In Belgium, the Benelux countries have agreed to effectively nationalise Fortis Bank followed by Citigroup acquiring Wachovia Bank’s banking operations only last week seen a possible rescuer itself. The boss of the IMF changed his view on Fri he said the world economy would slow to 4% this year and pick back up to 5% in ’09 by the weekend he was gloomier. See attached a thoughtful article by Thomas Friedman of the NYT Spt 28, “Green the Bailout” (www.nytimes.com).

With China on holiday Asia it was extremely quiet. Then a stronger US$ and worries about growth saw the base metals buckle under the selling. The LME stocks were neutral but failed to stem the tide with ni stocks rising 1254 tonne with 960 into Rott. Other commodities are selling off the Chinese weekly iron ore import prices fell 17% and the Australian Newcastle thermal coal price has fallen to a six month low since its Jul 4 high of $194.7 / tonne.

The US began without the expected “bail out” bounce as more bank difficulties spiralled the DJI off over 300 points. The Aug personal income reading fell 0.9% (Jul -0.8%) and spending was flat (+0.1%). The Aug Chicago Fed mid West manufacturing index fell 2.6% (Jul +0.2%). The commodities fell as the market see nothing but gloom for economic growth going forward. The magnitude of the fall in base metals without the Congressional vote could be overdone near term.