Against the Grain

There appeared to be an air of surprise around in Europe this morning amongst traders as they absorbed a fall in Wall Street following the US governments move to buy non voting preferred shares in 9 major banks. The nervousness perhaps caused by the unexpected use of the US$ 700 billion TARP package and the wider philosophical sea change of the US Treasury and Fed LLP sovereign wealth fund extending its portfolio of financial assets. On the economic front a comment by San Francisco Fed President Yellen that the US was already in recession heighted growth worries. On the metal specific front Rio Tinto noted in their Q3 operations review “In the near term, the Chinese economy is pausing for breath. China is not completely insulated from an OECD recession and we will see an impact on Chinese exports. However, the near term slowdown of growth is substantially due to tightening of monetary policy introduced by the Chinese government last year in order to tackle inflation. Furthermore, we expect third quarter economic data to show an exaggerated slowdown, reflecting the postponement of projects during the Olympics. Looking further out, Chinese GDP will remain largely driven by the domestic economy and we expect industrialisation and urbanisation to continue apace with strengthening demand across a range of Rio Tinto products.“

The weekly ABC / Washington Post consumer sentiment index was -48 from previous -43 as it registered the public reaction to the recent financial turmoil. The Aug Westpac Australian leading index declined -0.1% to 259.2 points.  In Europe the Automobile Manufacturing Association reported Spt car sales fell 8.2% to 1.3 million units (Spt ’07 1.42 million units). LME stocks were again dominated by al that rose over 55 kt mostly into the US. We are hearing that Codelco has agreed a European cu premium of US$ 80 / tonne cif after US$ 115 last year. While it is reported the present financial environment might see Vedanta abandon its bid for the Grupo Mexico bankrupt US offshoot Asarco. There was a report on Bloomberg that trade in coal, iron ore and other commodities are slowing as tighter credit and worries about counter party risk has frozen movements and seen the Baltic Dry Freight index fall 80%. In Japan scrap iron and steel prices fell 33% this week to US$ 256 / tonne for H2 grade ferrous scrap. The Spt Euroland CPI rose 0.2% (Aug +0.3%) making it 3.6% yoy (3.8%). The UK unemployment rates rose to 5.7% in the three months to Aug this compares with Euroland 7.5%, US 6.3% and Japan 4.2%).

The FAO reported world cereals production will rise 4.9% this year helped by a better than expected European harvest the total output of 2.23 billion tonnes they see significantly improving the supply / demand balance. In turn this should ease the food inflation that appeared in H1 ’08. US Spt retail sales fell 1.2% greater than the 0.7% expected (Aug -0.4%) and ex autos fell 0.6% (-0.9%). The Spt PPI fell 0.4% (Aug -0.9%) while ex food and energy rose +0.4% (+0.2%). The Oct NY Fed Empire State survey was -24.6 a record low as new orders fell sharply and employment improved (Spt -7.41). The Fed Chairman cautioned the market from getting ahead of itself by saying the credit markets and economic will take time to recover. What is worrying is again equities fell and bond yields rose.

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