Against the Grain

Despite all the talk and action from governments (EU finance minister meeting, the Fed’s new commercial paper programme, the Australian rate cut and UK bank bail out) the equities endured another global route triggered on Wall Street as investor confidence folded (the DJI fell 5%, Nikkei off 8.8%, ASX 5% and emerging countries similar falls with the Chinese CSI 300 index and Russian RTS both off over 60% this year, Egypt and Indonesian markets fell 10% today and various EM bourses saw trading halted). Investors are caught up in a spiral of terror were each sandbag of support triggers more liquidation, we believe that at some point there will be a 180 degree turn in sentiment as investors judge that the government guarantees are enough to stimulate buying. This change of direction could spark a sharp rally, if gold continues to move higher it might induce a spill over into other hard assets. However it does not detract from the longer term slowdown in demand associated with global growth readjustment that will see base metals lower.

Under these conditions commodities suffered further falls in Asia, cu touched 5380 and Shanghai was limit down so closed tomorrow (the Dalian Commodity Exchange ordered speculative shorts to close out profitable positions after the soya bean complex and palm oil fell the trading limit for a third day in a row). The weekly US ABC / Washington Post consumer sentiment index was surprisingly robust at -43 from previous -41. In Asia Australian Oct consumer sentiment was 82 (Spt 91). The LME stocks were dominated by a 6800 tonne rise in al, mostly into Rott. Aug German industrial production jumped 3.4% well above expectations (Jul -1.6%) yoy +1.7%. The final Euroland Q2 GDP data showed a 0.2% decline. The ICSG forecasts the refined cu market will be in a 100 kt surplus in ’08 rising to 275 kt in ’09 as demand under performs.

A noon a co ordinated 0.5% rate cut by the Fed to 1.5%, ECB 3.75%, BoE 4.5% and four other central banks kick started a recovery in European equities (FTSE at one stage off 4.8% is back to unchanged) and bolstered the metals cu traded off a low of 5227. In China the PBoC reduced lending and deposit rates by 0.27% to 6.93% and 3.87% respectively effective Thurs, they will also reduce the percentage of reserves banks must set aside. The recovery was halted as US retailers reported poor sales saw US index futures fall and the FTSE down 180 points. Ahead of the IMF and World Bank annual meeting this weekend in Washington the IMF World Economic Outlook sees “the world economy entering a major downturn in the face of the most dangerous shock in mature financial markets since the 1930’s”. They revised ’08 world growth to 3.9% (Jul 4.1%) and ’09 to 3% (3.9%) the slowest since ’02. At 15:00 it was reported that Aug US NAR pending home sales index rose to 93.4 an unexpected recovery (Jul 87.0). We have doubted that cost of production was a meaningful support level for metals in an environment of declining demand and zn seems to have broken decisively to the downside and al following.