Against the Grain

September is here, summer holidays are over and now for all the fabricator restocking that has been sidelined by the recession (now over); low interest rates (unless you are business, reports in the UK of businesses paying up to 9% over base) and all the economic data showing things are steaming into recovery with plenty of inventories around, this then is the hypothesis that greets metals. Although economics is an inexact social science it is interesting to see how the markets can become enslaved in dogma – equities are now either risk averse of risk friendly; recessions are over as soon as you have a quarter of growth; unemployment is a lagging indicator and therefore has little bearing on any expected recovery and the list can go on but all these will be tested running into the end of ’09.

The LME Mon holiday saw metals come under pressure as Chinese equities slumped 6% (more dogma, taking them 20% off their peak and therefore into a “bear market”). This combined with an LME Select trading system fault kept Asia very quiet. The LME stocks dominated by a large inflow of ni into Rotterdam and sn into Sing. The Chilean cu output in Jul dipped 1.3% to 427 kt from a year ago. After a tentative morning that saw cu touch 6225 buyers came in during the LME officials and the opening of the US. It appears Eastern caution about the direction of China was superseded by Western fund appetite to deploy low interest rate liquidity. As the US data release at 15:00 the markets firmed in anticipation with the DJI up and cu at 6360.

The “flood gates” opened on Aug economic data; first the manufacturing PMI – the official Chinese reading 54.0 (53.3); the smaller companies HSBC (was CLSA) reading 55.1 (52.8); Japan 53.6 (50.4); India 53.2 (55.4); Russia 49.6 (48.4); Italy 44.2 (45.4); France 50.8 (50.2); Germany 49.2 (49.0), Euroland 48.2 (47.9) and UK 49.7 (50.2), a mixed bag. Some other interesting bits that appeared the Australian RBA left rates unchanged at 3%; Japanese Jul industrial production slowed up 1.9% (Jne +2.3%) as retail sales fell 2.5% yoy and Aug domestic car sales rose 2.3%, truck sales slumped 33% and buses sales dropped 22%; South Korean exports  fell 20.6% yoy (Jul -21.8%) and imports declined 32.2%.  Indian Q2 GDP rose 6.1% (Q1 +5.8%) though drought worries are growing looking forward Jul Euroland unemployment was 9.5% (9.4%) and 1H German rail cargo movements fell 22.4% yoy although German Jul retail sales rose 0.7% (Jne -1.3%) and yoy -1% (-2%).

Ending the manufacturing picture the US PMI was 52.9 (48.9), y/day Chicago manufacturing PMI was 50.0 (43.4) as the car industry looked up. This was followed by older Jul pending home sales index +3.2% to 97.6 (Jne +3.6%) and construction spending fell 0.2% (+0.3%). The results saw investors take heart with equities recovering y/days sell off then falter quite badly. As the afternoon progressed a general sell off ensued which saw equities & commodities down and US$ up. Certainly not what we have been used to recently from investors at the start of a new month. A reason could be an update by two economist of their ongoing review of the present economy compared to 1929, “A Tale of Two Depressions” (www.voxeu.org).