Against the Grain

The US came back y/day after a long weekend and the markets had another bout of “throwing in the towel” led by equities as the DJI conceded almost 4%. We believe the catalyst for this was the weekend’s G7 finance ministers meeting in Rome best summed up by the hapless Japanese finance minister. The event reinforced the perception that governments do not have a co ordinated plan as to how to reinvigorate their economies and comes after the poor performance of the new US Treasury Secretary last week at his bank bailout press conference. It is clear that governments have got to take stock and appear with a comprehensive plan rather than trying to grab sound bites. Against this businesses that overstretched themselves in the good times and capitalised their profits are now seeking to socialise the resultant losses. See attached FT article Feb 18 edition by Martin Wolf, “Japan’s lessons for a world of balance sheet deflation” (www.ft.com).

In the US overnight the Feb NAHB housing market index improved to 9 from the record low (Jan and weekly ABC / Washington Post consumer sentiment index improved to -49 (-53). In Asia, Taiwan Q4 GDP fell 8.36% yoy (Q3 -1.05%). The metals were steady in Asia selling off as London opened. The LME stocks highlighted by a 139 kt rise in al stocks (US 98 kt, Sing 15 kt, Korea 11 kt & Europe 10 kt) taking total stocks over 3 million tonnes. On the other had cu (Busan 1500) and zn (Sing 3225 cancelled warrants fell) stocks declined reflecting the recent warrant buying in Asia. This stock moves lifted prices including al off their lows. Having bought cu, al and zn in Jan there are indications that China’s SRB is getting ready to do the same in Feb. It is generally accepted that in Jan they acquired 59 kt of zn, 290 kt of al and upwards of 200 kt of cu with an overall of target of between 300 kt (in the case of zn) / 600 kt (cu /al) by the end of Q1. While attention has been on the bushfires, torrential rain in the north of Australia is likely to disrupt mineral exports in the near term. The UK Feb CBI industrial trends survey was -44 (Jan -43) stuck at a 28 year low.

In the US today we got the sensitive Jan housing starts that came in at 466 k units or -16.8% (Dec 560 k units / -14.5%) and building permits at 521 k units down 4.8% (547 k units / -11.1%), not encouraging. The metals recovered after housing figures as European equities took back loses. This was followed up by Jan industrial production off 1.8% (-2.4%) and capacity utilisation 72.0% (73.3%). Around 14:30 the metals rally peaked out and sellers got on top again before stronger US equities turned the play again.

The markets seem to be caught in the eye of a storm at the moment waiting to see which direction they are flung out we would suggest a 70% chance it will be lower as the dithering of authorities destroys confidence and 30% higher as after try all the wrong options we strike it lucky. Tonight Obama unveils his administrations US$ 75 billion foreclosure relief plan let’s see if they do better. There is a danger that the more money governments throw at this problem the jittery the markets get.