Commodities - The party might be over
From the London Telegraph:
"US dollar rallies as extent of worldwide recession becomes clearer By Ambrose Evans-Pritchard, International Business Editor Last Updated: 10:13pm BST 08/08/2008
The psychology of global markets has shifted hugely over recent days as it becomes clear that Europe, Australasia and parts of Asia are sliding into recession.
The US dollar has launched its best rally in half a decade, reflecting a recognition that half the world is in even worse shape than the US. In fact, America is the only G7 country to eke out modest growth this summer.
The US dollar index - currencies watched closely by traders - smashed through resistance yesterday in the biggest one-day move since the long dollar slide began seven years ago.
advertisement"This was highly significant. Perceptions have changed," said Ian Stannard, currency strategist at BNP Paribas.
The greenback gained three cents to $1.5050 against the euro, with big moves against other currencies.
Pound at lowest in 21 months ECB hawks take a pounding More by Ambrose Evans-Pritchard Commodities tumbled as hedge funds and financial investors struggled to untangle themselves from crowded positions on the futures markets. Brent crude fell $4 to under $114 a barrel, down over 20pc since peaking in early July. The Baltic Dry Index has now fallen every day for over three weeks, dropping 30pc on fears that ship demand is fizzling out.
Copper fell to a six-month low on reports of rising inventories in China and Europe. Lead, nickel and tin all dived in frantic trading on the London Metal Exchange.
"We see a deep global recession," said Albert Edwards, chief strategist at Société Générale.
"Growth prospects in the Eurozone, Japan and the UK have deteriorated. Most now accept that recession has already begun in all three," he said. Mr Edwards predicted a "collapse" in emerging markets next. "You ain't seen nothing yet," he said.
The commodity slide boosts the dollar as petro-payments are recycled into euros, not the greenback.
A Bundesbank study found that for every $1 sent to the Middle East or Russia for oil, the eurozone gets 40 cents back. Europe is the chief supplier of cars and industrial good to the petro-economies. The US receives just 10 cents.
This bias is now going into reverse. Moreover, Danske Bank says there has been a $70bn net outflow of investment from the eurozone over the last year. It appears that foreign governments are sated on European bonds.
The drip-drip of bad news in America is now being trumped daily by the icy douche splashing over Europe. The markets were stunned by leaks from Berlin last week that Germany's economy had shrunk by 1pc in the second quarter. Yesterday Italy revealed a 0.3pc contraction.
The last straw was an admission this week by European Central Bank president Jean-Claude Trichet that "downside risks had materialised" and there was no clear end in sight.
The comments were followed by the ECB's lending survey yesterday, confirming that banks have cut back sharply on mortgages and household credit.
BNP Paribas said it was now clear that the ECB had misjudged the severity of downturn. The monetary squeeze of the last year has raised mortgage costs by 150 basis points in Spain, Italy, Ireland and other states that rely heavily on floating-rate contracts. House prices are dropping in several regions at rates that match the US slide.
Bernard Connolly, global strategist at AIG, said the falling euro would come too late to prevent a severe economic crunch across southern Europe. "We think the EMU credit bubble is about to burst," he said.
Current account deficits have already reached 10pc of GDP in Spain and Portugal, and 14pc in Greece. The region depends on foreign capital flows to keep its economies afloat. This is now under threat as investors become alert to the solvency risks of debt deflation, causing a blizzard of warnings from rating agencies on the health of the banks in these countries.
Over the last few months the US dollar appears to have hit the bottom of its cycle, suggesting its relentless slide since 2001 may finally be over.
Arguably, the US is now super-competitive. Airbus and Volkswagen are shifting production plant across the Atlantic. US furniture and textile companies have stopped outsourcing to China, and are coming home.
The International Monetary Fund says the dollar has fallen 25pc to 30pc on a global basis, just as it did in the late 1980s. There was no shortage of dollar doomsters at that time, warning that America was finished - left behind by Japan and Germany. Events played out otherwise. America was on the cusp of a recovery.
Will this be repeated? The US current account deficit has fallen from 7pc of GDP to under 5pc early this year, or nearer 4pc after adjusting for the oil spike. As the Habsburgs used to say, "the situation is desperate, but not serious"."