No way to start, or end, another week on the equity, commodity exchanges

Ye gads, it’s all about global financial volatility; some would say “mayhem,” as concerns over world economic growth mount–thereby further depressing confidence and sentiment as this great deleveraging continues. (Editor’s note: As explained in a Reuters news story, deleveraging is cutting back on the amount borrowed as compared to equity. It is the dominant theme today as the financial system recoils from the massive losses in structured finance and the housing bubble.)

The base metals plunged overnight following massive sell-offs in equities yesterday and overnight. The Dow Jones Industrial Average closed down 7.3% on Thursday (and was trading this morning below the 8,500 mark) while the Nikkei in Japan is down 8.5% and the Hang Seng in Hong Kong is down 7%.

The gloom is pervasive with gold and government bonds offering appeal as the banking meltdown continues and commodity and equity liquidation accelerates, affecting everything from aluminum to soybeans to General Motors. The dollar, meanwhile, is showing (surprising) strength, trading at year+ highs against the Euro. All these head-spinning goings on while we ponder the fastest restructuring of a banking system in economic history.

For some perspective on the declines we’re seeing in both equities and commodities, the recent drops are certainly eye opening: the monthly CRB Metals Index that measures copper scrap, lead scrap, steel scrap, tin, and zinc was off 29% from its end-April high to end-September. More current is the LME Index, and that’s down 39.4% as of yesterday from its March peak.

And the Dow? From its October 9, 2007, close, the Dow Jones Industrial Average is also off 39.4%–“collapsing like a wet taco,” as one market sage observed. Stock market bear markets are usually defined as one that shows a decline greater than 20% from peak to trough, so what we’re currently seeing more than meets that criteria. The last bear market on the Dow was back in 2000–2002 when the peak to trough posted a 38.6% drop. And for some perverse comfort, between 1929 and 1932, the percent drop from high to low was 89.5%.

A review of this week’s goings on

The hoped-for “Turnaround Tuesday” didn’t happen with the Dow falling by 508 points, to close the day at 9,447. And, just when it looked like the global markets were paralyzed (at the very least,) we saw a historic coordinated interest rate cut by six central banks (but not Japan who, nevertheless, supported the move.) In the U.S., the Federal Reserve cut its federal funds rate by ½ % to 1½ % as well as cutting the discount rate by a like amount.

So, is this the “magic bullet” that will restore market confidence, unfreeze the banking system, and kill all thoughts of a looming global recession, or is it just a symbolic recognition of the seriousness of the financial distress? The move was necessary, but apparently, not sufficient. Unexpectedly, Wall Street greeting Wednesday’s news with extreme volatility as bulls and bears battled throughout the day. At days end, afternoon gains had faded and the Dow closed lower. London Metal Exchange (LME) base metals were also weaker but closed off their lows. Meanwhile, back in New York, Commodity Exchange (Comex ) December copper again fell hard, losing almost 18¢ to close @ $2.36. Gold responded positively, adding $24.50/oz to $906.50.

After Thursday’s Wall Street crash (let’s not mince words) market players remain on edge today, Friday, with the focus squarely on the credit markets. This is what is driving the stock market. Today’s meeting in Washington, D.C., of the major world finance ministers may offer a measure of calm as the day progresses. We can hardly wait to see what today brings.

Back to the drawing board

Predictions by some (a few) this year who bravely guessed that the U.S. could avoid a recession have finally been dismissed. According to economists recently surveyed by Bloomberg, the domestic economy is expected to shrink at a 0.2% annual pace in the third quarter and 0.8% in the last three months of 2008. Also, First Trust Advisors who, heretofore, were consistently more bullish on the U.S. than many, now see third quarter gross domestic product (GDP) at zero growth, with this quarter at a minus 1.5%, followed by zero growth for first quarter, 2009. They do, however, see a fairly strong rebound in the second half of next year. Let’s hope so!

As for the global outlook, this month’s International Monetary Fund (IMF) economic outlook concluded that, “The world economy is entering a major downturn in the face of the most dangerous financial shock in mature financial markets since the 1930s.” For 2009, the IMF is projecting U.S. GDP at 0.1%, below that of Europe, Japan and “other advanced economies.” Global growth in 2009 is pegged at 3.0% — the slowest pace in seven years. Uggh!

So, recent near-term forecasts for domestic hot-rolled sheet in coil (HRC) from our friends at World Steel Dynamics and others all point south. The latest from UBS Investment Research, for example, has HRC at $825 for the fourth quarter of this year compared with an earlier forecast that was closer to $975. Next year, the firm is looking at a $816/ton average.

Goldman Sachs paints a more depressing picture as global steel buying, they say, “has almost ground to a halt. “Consequently, they’ve lowered their U.S. forecasts considerably and now see HRC averaging $767/ton this final quarter. For 2009, Goldman Sachs has HRC averaging $677. That’s almost 30% lower than their previous forecast! Morgan Stanley’s latest on the domestic steel industry looks downright rosy compared with Goldman Sachs: They see next year’s HRC coil average at $841 per net ton.