Against the Grain

The DJI has recovered most of last week’s loss as the talk of monetary tightening slackened in the press weakening the US$ and building a recovery in metals, oil and other commodities. We expect this will be the pattern any move by China on monetary policy to tighten will send the markets into retreat and they recovery when it goes quiet. Hence our view that the two driving fundamentals will be China and interest rates. Combining the two, a 10 year Chinese bond auction went off at lower yield than forecast. The markets are now revving up for US employment data at the end of this week and Jan Chinese data mid next week with a prediction today from a Beijing based economist that imports could have leapt 100% yoy  (Jan ’09 -43%), exports they expect will be up 30% yoy. This article from the NYT is worth a read by Thomas Friedman “When Economics Meets Politics”, it highlights how more political issues could delay / derail economic recovery, http://www.nytimes.com/2010/02/03/opinion/03friedman.html.

The metals got a boost in Asia as the US$ weakened and the volumes picked up as short covering met some CTA selling. First Wed so option declaration day upon us with no one expecting fireworks after the price falls of late. The LME stocks dominated by a large al fall (mostly cancelled warrants moving out of Europe and US – the former suspect being used the latter hidden in a cheaper location) taking the total to 4,600,000 tonnes and likely to continue into third Wed. The general decline in stocks of the couple of days has seen traders push prices rapidly higher. Chilean miner Antofagasta reported ’09 cu output down 7.4% at 442.5 kt (with expansion and new mine it could reach 700 ktpa by ’11). The cash costs rose 10.3% to US$ 0.963 c/lb (US$ 2123 / tonne) not sure if this is with or without by product credits (suspect the latter).

In Australia the Jan AIG service index declined to 47.4 (50.0). In Europe the Jan UK Nationwide consumer confidence index improved to 73 (70). A mixed set of Jan service PMI data Italy 50.9 (53.9); France 56.3 (57.0); Germany 52.2 (51.2); Euroland 52.5 (52.3) and UK 54.5 (56.8) – they are all in expansion but the pace has slowed. The Euroland composite PMI (services & manufacturing) 53.7 (54.2). The Dec Euroland retail sales came in unchanged below an expected rise (Nov -0.5%), yoy -1.6% (-2.0%), as we keep saying when is the final demand coming.

Overnight the weekly ABC consumer sentiment index dipped to -49 (-48) and Jan vehicle sales at an annual rate of 10.82 million units (11.23) below expectations. The weekly MBA mortgage index rose 21% on steady rates but worries they might rise (-10.9%) refinancing up 26.3% and purchase index 10.3%. The a preview of Jan employment, the Challenger job cuts fell 70.4% yoy (-72.9%) and ADP private employment fell 22 k less than expected (-84 k). The US$ rebounded and metals fell. At 15:00 the Jan non manufacturing PMI was 50.5 under anticipations (interestingly revised down to 49.8 from 50.1). Had the situation after this where DJI was rising with the US$ and metals under pressure as oil and gold are steady. Then the weekly DoE crude oil inventories were a mixed lot keeping oil firm. The revenge of the bears came in the afternoon as a “bull trap” was sprung with not often seen vengeance as cu was left technically in tatter with a classic outside day closing on its low in massive volume.