Against the Grain

The DJI along with other US equities fell around 2% despite a slew of good economic data, which begs the question why, were the numbers just not good enough; did the 6.7% Chinese equity fall Mon trump them; are equities under the spell of “woe Spt”; has the investor tired of putting money into the commodity sector? All questions that will be answered going forward. Following on from yesterday’s comments about “dogma”, until recently it was assumed if equities rallied, bond yields should rise as they both reflect an improving economy. Should equities fall and bond yields rise then that is bad as it signals slower growth and rising government debt. Recently we have seen rising stocks and falling bond yields which would seem to indicate investors are hedging their bets - buying equities anticipating a recovery but accumulating bonds in case the recovery fails to materialise. Or does quantitative easing mean governments issue debt for banks / investors to take up and then sell on to the central banks who are buying up government debt to add liquidity - another circle but is it “virtues or vicious” for the economy?

In Asia Australian Q2 GDP rose 0.6% better than expected (Q1 +0.4%). The LME has Spt option declaration this morning with prices tracking lower into stocks before a recovery. So far the investor month start rush has been not eventuated but still time. The LME stocks are beginning to gather some broad upward momentum that asks the question is there a lack of demand about or are finance deals rolling off and can’t be rolled or something else. With little news around the metals regained some lost ground as equities and oil recovered. In a report Deutsche Bank says lower operating costs and the current rally in metal prices means EBITDA margin is 43% and likely to continue above 40% into ’11. They went on to point out that of the 25 companies they cover 17 have either a Chinese, corporate or institution in the share register that owns more than 10%. Al producers are offering Japanese users a Q4 cif premium of US$ 120 / tonne (Q3 US$ 75) and the first time it has been over US$ 100 / tonne since ’95 highlighting how well the al surplus has been squirreled away. Ahead of US data the metals were very cautious for quite long periods of time cu bid / offer spread was as much as US$ 10 but it was reasonable to expect a pre data rallies that appeared but had little traction, gold the real winner and could go higher if investors become disillusioned.

There is a focus on the auto sector at present as analysts try to fathom out how successful the “scrappage schemes” have been and have they kicked started an industry recovery, German Aug new car registrations rose 28% with growth year to date up 27%. The revised Q2 Euroland GDP was unchanged at -0.1% with yoy at -4.7% consumer spending improved to +0.2% from 0% as fixed capital expenditure declined -1.3%.

The US Aug auto sales rose 1% to 14.1 million annualised units or a 26% rise yoy, Ford saw sales up 17% yoy with increases for foreign producers while GM sales were off 20% yoy and Chrysler down 15%. The weekly ABC / WP consumer sentiment index was steady at -45. The weekly MBA mortgage applications fell 2.2% (+7.5%). Today the emphasis turns towards Fri US employment data with Aug Challenger layoff data fell 21% to 76 k (-5.7% to 97 k) and ADP private business employment declined 298 k against an expected 213 k decline (-360 k). The Q2 non farm productivity rose 6.6% the biggest rise since ’03 (Q1 +0.3%) as unit labour costs fell 5.9% (-5% revised from -2.7%). Then at 15:00 Jul factory orders rose 1.3% low end of expectations (revised to +0.9 % from +0.4%). Finally the hottest data on the block weekly DoE oil inventories saw oil dip then rally higher taking everything with it.