Against the Grain

We are trying to understand how the upheaval in the financial market impacts on the broader economy. Apart from obvious sectors - housing, construction and pensions, to what extent will it impinge on general day to day activity? The run up in “food and fuel” earlier in the year crimped family budget, since Jul the rapid decline will be a boost to disposable income. This will be supported by rate cuts and other government moves like pressurising banks to lend. While doubtful it will negate the full impact of the banking implosion it could perhaps mitigate the contagion. In another area it seems the de coupling of emerging markets from the developed world is over as they hurtle to re couple in the downturn, the MSCI emerging market index of shares is having its worst monthly decline in 20 years. See attached NYT Oct 23 edition article “China, an Engine of Growth, Faces a Global Slump” (www.nytimes.com).

The news overnight was dominated by the fall in US equities (DJI -5.7) and its flow on into Asia, however on closer scrutiny the major Asian markets held up pretty well (Nikkei -2.5%, ASX -4.4% however Korea -7.5%, India -4% while in South America Brazil -10.1% and Argentine -14%) the currencies were little changed. So at London opening with the metals lower, cu touched 3850 in Asia, bargain hunters were quickly in and rewarded. The NZ Reserve Bank cut rates 1% to 6.5% as widely anticipated. The Shanghai cu contract has been halted tomorrow after falling the limit for a third day, dependant on LME moves there could be further mandatory close outs before the reopen. The LME stocks saw increases in most metals, cu 1500 tonnes; al 3475 moving the total over 1.5 mt; zn 3050 Dubai 2700 and ni 840 tonnes into Rott. The Oct French business confidence index fell to 88 (Spt 91). The Spt UK retail sales fell 0.4% less than anticipated (Aug +1.1%). Now for some good news, Spt Polish unemployment declined 8.9% (Aug 9.1%) and Aug retail sales up 11.6% yoy.

Shortly after 11:00 the European equities went red and pressure built on the metals as the US$ strengthened and oil declined. By the officials cu had posted a new low of 3820 and gold low 697. In very volatile trading currencies and commodities hurtled around like a ball bearing in a pin ball machine, pb bid offer spread US$ 24 with the bid US$ 27 below the last trade, like a good Shane Warne over unplayable.

The weekly US jobless claims were 478 k from previous 463 k. The catalyst for a US$ 155 twenty minute rally in cu was a comment that China was mulling positively the Washington G20 emergency meeting. It helped oil jumping US$ 1.5 / bbl with OPEC meeting tomorrow. The DJI quickly up over 150 points then equally fast back to down 40 in first 15 minutes of trading as the opening rolls through the stocks they do not all open at once, cu in particular clattered off with it, no wonder someone pointed out that metals are now 90% correlated to equities so for the time being losing their much vaunted non correlation tag, but a lot of sacred cows have been slaughtered recently. The DJI up over 200 points and everything else trended higher as we entered the pm rings.