Against the Grain

Well away for a week and very little seems to have changed. Are we in an eye of the rolling financial storm that we battle each year. The economic evidence continues to mount that the world economy is slowing (next week sees Aug data). Yet record Aug M&A activity suggests corporations flush with strong earnings have become predators for cheap added on or new business streams. Rather than employ capital in new investment that would expand the economy they prefer to acquire existing operations in the hoping to make them sweat harder. The one sector that will do well out of this is the financial sector the governments bail out, the BHP deal is set to generate fees of US$ 190 million in fees and traders rushed to benefit.

The metals have been particularly steady but first impressions are investors would like to rally these things on the slightest excuse rather than sell them off. The VIX index remains comfortably in the mid 20’s indicating little stress in the markets. This would tend to go against the economic evidence but interest rates are set to remain low and “cheap money” lusts excitement. Since the last report the LME stocks have been dominated by a third Wed rise in al up around 80 kt, today al led the falls and cu the rises. The Chinese Jul refined cu imports rose 6% however are off 23% yoy and 14% yea to date. The IAI said Jul daily average primary al production was 66.3 kt (Jne 66.6 kt) as monthly production was 2.054 million tonnes (1.999 mill tonnes). It is not clear how much of Chinese output has been affected by the recent weather. Meanwhile the World Steel Association said crude steel output rose 25% in the first seven months to 820 million tonnes. Chinese production was up 18.2% at 375 million tonnes – that is 45% of world supply. In Australia the weekends Federal election has resulted in the much anticipated hung parliament as the horse trading begins. The prospect is the first minority government since 1940 and resource shares rose as the threat of a mining tax receded. The DJI opened higher prompting some light metal buying as traders settle into equity surf mode, then it gave back an 80 point gain so the metals followed. At 17:00 it was all square.

On the data front today saw the Aug preliminary PMI data German manufacturing 58.2 (Jul 61.2), services 58.5 (56.5); France 54.7 (53.9) and 59.9 (61.1) respectively and Euroland manufacturing 55.0 (56.7), services 55.6 (55.8) and composite 56.1 (56.7) in line with our expectation that the region’s economic recovery has peaked. The preliminary Aug Euroland consumer confidence recovered to -12 (-14). In the US the Jul Chicago Fed National activity index improved to 0 (Jne -0.7).