Stock markets, base metals values are falling worldwide

Nonferrous prices down from Friday as world demand slows

By Tom Stundza -- Purchasing, 10/6/2008 9:22:00 AM

After President Bush signed the $700 billion bail-out bill, the question became: “Will it be enough to break the logjam in the credit markets?” This morning, it seems the markets are answering with a resounding no. “Stock markets around the world are getting pummeled, while credit markets continue to tighten,” says the Daily Metals Commentary from the MT Global Markets offices in New York. Dow Jones Industrial Average sank 318 points within the first hour of the market’s open as anxiety about the global economy intensified. Earlier, exchange sin Asia also had declined: Nikkei in Japan fell 465 while the Hang Seng in Hoing Kong crashed by 879.

 “While the U.S. bailout package is implemented, the (base) metals markets are likely to remain nervous but with other support coming in from other economies and with potential for rate cuts to be announced too, both shorts and longs are both likely to be nervous,” says analyst William Adams at Basemetals.com in London. “Overall…expect very volatile trading ahead.”

 “Metals are off sharply, as are oil prices; and the only asset classes that seem to be winners are gold and government bonds,” writes MT Global Markets analyst Edward Meir. He says that “as credit fears spread, there is even talk now that the (Federal Reserve Board) may have to start lending directly to states and corporations, while the Treasury may have to guarantee interbank lending. We are not there yet, but these days anything is possible.”

The growing economic and financial troubles in Europe and Asia, coupled with the sharp declines today in emerging-market stock markets, suggest that the recent dollar rally could have more room to run. (This morning it was at $1.3570 against the Euro). “One commentator put it best, when he likened the dollar’s surprisingly upbeat prospects as being akin to the proverbial one-eyed man walking in the Valley of the Blind,” writes Meir, “but having said that, such strengthening will only contribute to the downward drag on commodity prices.”

In the same vein, in an interview this morning from London, Gayle Berry, the commodities research team leader at the Barclays Capital unit of Barclays Bank, says that “it now appears that base metals will continue sliding in value because of the deterioration in the global economic environment.” This morning, world aluminum was down to $1.02/lb on the London Metal Exchange while copper was down to $2.54.

She points out that market fundamentals of growing supply and falling demand mean as much, if not more, than the switch in risk-reduction activities to the dollar and gold from commodities. “Commodity investment trends are important but not the driver in the slippage in metals,” she says, insisting that “business expectations of weaker demand now and in the future” are an even more important trend setter.