Against the Grain

As with last year the H1 has seen a head long rally in metal prices predominantly driven by investors search for “return”. At this time last year the world economy was already slowing as the West grappled with the growing financial crisis and emerging markets battled inflationary pressures caused by the hike in commodity prices. Interest rates were on the rise which was beginning to crimp consumer demand. This time interest rate are as low as they can go making deal financing cheap; the economic stimulus packages especially in China and other parts of Asia have created excess liquidity. In the West banks have been given unprecedented public help to rebuild shattered balance sheets. Economies are on the way up as in Asia or the perception is they are on the way up in the West. While consumer demand is strong in Asia unemployment and debt worries are yet to unshackle Western consumers. The most likely risk to the present rally is Asian banks begin to reign in excess liquidity especially China where authorities prefer blunt monetary instruments such as lending embargoes to interest rate moves. In the West the biggest danger is the recovery does not gather the momentum many expect. In such circumstances investors could take a rain check on metals and price retreat 35 / 45% and still look good. Such a move would be a stimulus to metal consumers. The attached The Economist article is worth a read “Emerging Asian economies – On the rebound” (www.economist.com/displaystory.cfm?story_id=14209825).

The poor US spilled over into Asia in China the Shanghai composite index fell 5.8% as Jul direct foreign investment fell 37.5% yoy to US$ 5.36 billion (Jne -6.7%), a large insurance firm missed its forecast and Yunnan Copper Industry Co. said there are “no clear signs” of a recovery. In Japan Q2 GDP rose 0.9% (Q1 -3.1%) yoy up 3.7% (-11.7%) exports were the key rising 6.3% or 1.3% of the GDP growth and consumer spending increased 0.8% from the stimulus package or 0.5% of the GDP, while business investment fell 4.3% and it is 15% of the economy the end result the Nikkei retreated 3%. In India the broad Sensex index dropped 4%.

The metals continued under pressure selling off in Asian time which flowed into third Wed London with the cu low at 6000. LME stocks saw al down indicating a month without the usually large deliveries we have seen all this year? The Select volumes were very light in the pre market reinforcing our view that the fund buyers of late are index orientated and will not be tempted to sell. Reports reaching us from China talk of cu being offered FOB Shanghai around US$ 55 / tonne any South American brand you want. In the DRC Freeport staff at the recently commissioned Tenke Fungurume cu mine have been arrested over alleged misappropriation of public funds.

In the US Aug NY Fed Empire State manufacturing index was a strong +12.08 (Jul -0.55). Commodities rebounded into the US equity opening before giving up ground as DJI looked at 200 down. After that commodities fell back on the sport of “equity surfing”.