Against the Grain

Overnight prices pushed higher as Select volume showed zn dominating turnover. In Australia the central bank cut the benchmark rate 1% to 3.25% as the government announced a US$ 27 billion stimulus package. In Japan the government reverted to an old trick of purchasing equities from commercial banks to boost liquidity, something they did in the 90’s.

After a break y/day cu (global) and al (Europe 9600, Asia 3300 and Korea 11,900) again flowed into LME stocks. The Dec Euroland PPI fell 1.3% (Nov -2%), the annual rate was 1.8%. We are getting comments from people asking why the metals continue to hold their value despite the continued influx of LME stocks, cu rose 150 kt (44%) in Jan, al jumped 471 kt (20%) to an all time high and zn 89 kt (35%). We suspect macro investors have taken the view that the government and central bank action combined with the precipitous fall in growth in the 2H ’08 will create the foundations for a recovery as ’09 unfolds. This forward looking view is cancelling out the current rise in inventories, which are seen as a lagging indicator. Should there be no signs of a recovery then the exiting of these investors from the long side of the metals could portend another Oct price slump. This would increase the likelihood of further idling of production and the downward spiral would continue until the conditions are in place for a demand led recovery. Our view is cautious optimism, with the conditions being put in place for a demand induced recovery, the correct path near term.

In the US Dec pending home sales index was 87.7 up 6.3% the first increase since August (Nov 82.5).