The US economy is once again centre stage for all the wrong reasons, and people are increasingly speculating about the odds of the US dipping into negative growth, in other words… a recession.

Various media and financial commentators are pitching their estimates for the probability of a recession. Even former Fed chairman Alan Greenspan has put the odds as being between a third and a half. However, the emphasis so far has been on slower growth rather than negative output.

Sentiment is increasingly focused on the actions of the Federal Reserve or more accurately, the market’s confidence in Fed Chairman Ben Bernake. Last week the minutes from their last meeting revealed they were reluctant to cut rates in the face of rising inflation. However, fed futures are currently pricing in a 65% chance of a cut in the December meeting. Many analysts believe that the Fed may soon have no choice but to act.

Over in the UK, MPC meeting minutes revealed that members had voted 7-2 in favour of keeping rates on hold, as expected. The chances of a rate cut in December increased on Friday, as Deputy Governor Rachel Lomax went on record as saying that the bank needed to be “very alert to the risk that the economy may be slowing too abruptly. At current interest rate levels, monetary policy may well be on the restrictive side”. Despite this, a ‘no change’ verdict is still the most likely option at the December meeting.

The Eurozone credit markets saw widening spreads between German Bunds and bonds from countries such as Italy and Greece. This flight to quality occurred as credit market liquidity once again froze on Thursday, with the US markets being closed for Thanksgiving.

The Euro saw dramatic movements at end the week. The EUR/ USD exchange rate came within 32 pips of 1.50, but slumped dramatically to just above 1.48 in later trading. Talk of ECB action to counter the effect of a strong Euro was behind some of the fall.

Next week is dominated by housing sales data, with UK house prices released on Monday, US existing home sales on Wednesday and New home sales on Thursday. With much of the bad news already in the market, it will be a case of how bad the news actually is that governs reactions to this data next week. Other first tier announcements include US consumer confidence GDP figures.

Before Friday’s recovery, November was looking at being one of the worst months on record for the FTSE. This November in particular has been the worse since 2000 for the S&P 500, and at the time of writing was showing the fifth worse intra month decline of all Novembers on record. After such large moves, it is not uncommon for the market’s spring to recoil.

The recent volatility has pushed up the premiums available with trades betting against further large movements. This presents a potential opportunity. After such large moves in November, the S&P 500 has a tendency to be positive in December, although the movements are extremely choppy. Between now and the New Year, there is the distinct possibility that markets could grind rather than crunch, making a barrier range trade seem attractive. It’s the economy, stupid but the stock market may just be able to stave off the feared all out collapse until 2008.

A barrier range trade on the S&P 500 with the expiry set as the 3rd of January 08 and the barriers set as 1233 and 1628, returns 12%. This provides roughly 200 points protection either side of the current market levels. This represents the maximum range allowable by BOM for the time period. This puts the barriers well beyond the highs and lows for the year.

- THE END -

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There is now some in-depth research going on with analysts looking for stocks with higher than normal borrowing requirements. The ‘dodgy’ gearing up of balance sheets over the past decade may come back to haunt many companies.

Financial engineering looked very good in the era of the ‘death of inflation’. However in the cold dawn of high costs, high wage demands, rising taxation levels and high interest payments there are likely to be some red faced Finance Directors.

As anyone spread betting on the FTSE 100 knows, the UK Leading share index is struggling to maintain any rallies. Adding 4-5% inflation is not making trading any easier.

Simon Denham of Capital Spreads recently commented, “On the face of it Sterling’s decline and the prospect of high interest rates for longer will drag on returns and clients are settling in with some solid shorts”.

The global situation does not exactly look rosy as capital destruction continues in the Far East, the Chinese stock market is now down over 60% and they are still trading on a P/E of over 18 with inflation over 8%. Europe and the UK are on a more normal P/E of around 12 with inflation at 4-5%. The dash for growth in the emerging markets has led to many companies operating on miniscule margins with no room for manoeuvre. A small set back could lead to disaster for a huge block of export driven manufacturers.

The fact is that the macro economic situation is not moving in the UK’s favour. Government profligacy over the past decade (even on a high tax base) has left Captain Darling sitting around with a dazed expression as Our Gordon’s poisoned legacy is handed over.

Everywhere we look we see huge reductions in revenue income. Much as we all hated the banks they paid monumental cheques into the exchequer (not much hope of that this year). In fact, with the UK’s method of payment in arrears the Treasury will probably have to be paying back over the next few quarters. The £6bn Housing Stamp Duty will be lucky to be just half this total and the ever rising level of unemployment means an increase in outflow AND a decrease in income tax revenue. On the plus side there will be a huge increase in Oil tax inflows (remember that most of the price we all suffer at the pumps is nothing to do with the actual cost of the black stuff). Having said that crude oil prices are steadily dropping.

Much of Europe will be better insulated against these problems and the US, for all of the Sub Prime problems, is actually operating on a low(ish) tax level giving the President a good store of ammunition to kick start growth.

Note that spread betting carries a high level of risk to your funds. You can lose more than you initially invest. It may not suit all investors. Only speculate with funds that you can afford to lose. Ensure you understand the risks and seek independent financial advice if and when necessary.

Guess what?

That heavy thump you heard from stockmarkets around the world, especially in the US with the 9% fall in the Standard & Poor’s 500 index on Wednesday, was the sound of the last rose coloured glasses falling from the noses of investors, commentators and investment analysts who have finally accepted that the globe is heaving into a recession, led by the tottering US, UK and European economies.After falling Wednesday, European markets again fell heavily Thursday, but the selling wave in the US slowed as investors accepted the new reality. In fact Wall Street bounced strongly in late trading.

Resources were heavily hit as big investors abandoned their last defensive position.

Wednesday and Thursday saw a collection of figures, reports and comments that confirmed that the global economy will drop below the International Monetary Fund’s idea of a global recession in 2009: that’s global growth of 3%.

It is now clear that the US economy is sliding, nastily, but speedily into a slump the like of which we haven’t seen this side of World War 2. US consumers, who carry the US economy on their backs by generating 70% of annual activity, are being battered into submission.

Consumer spending, consumer credit and retail sales are all falling at levels not seen for decades. There is every chance that October’s and November will see declines even sharper than we have seen in August and September.

The monthly investment manager’s survey from Merrill Lynch, released overnight, says “Investors are waiting for the right conditions to return to equity markets amid the most pessimistic outlook yet recorded”

The survey, completed as global equity markets fell in value by 18.7%, shows that almost seven out of 10 respondents (69%) believe that the global economy has entered recession, up sharply from 44% one month ago.

Growing risk aversion has led to a record 49% of respondents who are overweight cash.

The number of respondents who believe equities are undervalued has reached a 10-year high, at 43%.

“Fund managers are waiting for the triggers that will give them the confidence to buy,” said Gary Baker, head of equity strategy at Merrill Lynch.

What they are looking for is a loosening of monetary conditions and for third quarter earnings to clarify where problems and opportunities lie across equity markets.”

But the survey showed that respondents appear to be placing little or no credibility in consensus earnings estimates for the year ahead. A net 92 % of respondents regard estimates as “too high,” and more than half say estimates are “far too high.”

At a time of global pessimism, the gloom is no more concentrated anywhere in the world than in Europe. A net 41%t of global asset allocators are underweight euro zone equities. Europe has now assumed the UK’s mantle as the world’s least popular destination for equity investment.

The survey also found U.S. fund managers are now much closer to fully accepting what they expect will be a deep and prolonged U.S. recession.

“In our view, however, it is too soon to say we have reached a bottom in equity markets given the current financial market turmoil,” said Sheryl King, senior US economist at Merrill Lynch.

Oddly enough, we should be relieved by this information because there’s something comforting by an acceptance of an impending or developing recession.

I’d much rather face that than the absolute fear and loathing we saw on markets last week in the global credit panic.

That’s not to say the pressures from the panic have gone: they are still with us, but Wednesday and yesterday’s weakness on global markets was more an old fashioned acceptance that economic activity is sliding and that there will be more pain and suffering before we get through it.

But not an absolute and stunning collapse.

We are not out of the woods by a long way, but if central banks and governments hold their nerves, we could get away with just a severe economic mauling instead of a replay of 1932-33.

So what happened?

The US Fed said that economic activity had worsened across all of its 12 reporting districts across the country with falling activity in retail, financial services, housing, tourism. The Fed’s beige book survey of economic conditions revealed pervasive weakness, with tight credit, deteriorating consumer spending and a weak labour market across the nation.

Fed chairman, Ben Bernanke and the head of the San Francisco Fed, Janet Yellen, both made it clear, in their own way, that there was no quick fix or early rebound for the slumping US economy.

That hopes of a recovery in 2009 were misplaced, and 2010 might see some improvement.

US industrial production fell sharply last month, hit by storms, slumping demand and the credit crunch. The Fed said the drop of 6% was the largest for 24 years and production would have dropped even if there hadn’t been storms in the Gulf and a strike at Boeing.

Another Fed survey in Philadelphia showed a sharp contraction in manufacturing in the area, while the commercial paper market again shrank, but the rate of decline is slowing as the Fed starts lending money to leading companies.

US retail sales fell 1.2% in September, almost double the fall forecast by economists as cars, food and every category saw weakness. Sales on internet auction site, eBay off 1% in the quarter, the first fall in history of the company.

The fall left retail sales 1% lower than a year earlier, signalling that consumers withdrew substantially from US shops and malls in the month.

A leading member of the US Federal Reserve, Janet Yellen, head of the San Francisco Fed describing the US economy as being in “appearing to be in recession” and worryingly warning of the chances of inflation falling away next year in the US to replaced by price deflation.

The New York Fed produced its general economic index that had its worst reading since it started back in 2001, when the last US recession was starting.

In good and bad news, US producer prices fell for a second month in a row as oil and fuel costs fell, and demand eased.

The US Labor Department reported that prices paid to US producers fell 0.4%, while core price rose 0.4%. It’s a sign more and more American companies are finding it tougher passing higher costs on up the production chain.

US consumer price inflation was better than forecast because of the fall in oil prices and slumping demand: they eased 0.1% for the second month in a row and rose 0.1% on a core basis. Inflation over the year to September was up 4.9% from 5.4% in August.

The fall in retail sales was the third in a row, and the deepest: it was driven by that 27% fall in US car sales in the month and falling levels of demand caused by the credit freeze as consumers were refused credit, or stopped buying on the cards.

Economists say that with retail sales down in the September quarter (and consumer spending and credit also lower) its looking certain that real consumption will fall for the first time in a quarter in the US for 17 years.

In Europe, Germany, the continent’s biggest economy, has slashed its growth forecast dramatically.

The German government says growth for 2009 from 1.2% 0.2%, reflecting the rising international risks for the economy, although it warned the precise extent of the slowdown would depend on the severity and duration of the financial crisis.

The new estimate matches the joint forecast published by the country’s leading economic institutes in their regular Autumn report on Tuesday. The institute also issued a worst-case scenario that could see Germany’s economy shrink by 0.8% in 2009..

The fall in retail sales is making US retailers and forecasters increasingly wary about the highly important Thanksgiving-Christmas retailing season: it could be a terrible holiday for consumers, retailers and the economy and analysts now say the US will have its second quarterly slump in economic growth in a row in the December quarter.

Growth this quarter may dip into the red, and that will produce an outright recession by conventional US definitions.

Ms Yellen said the US economy was likely to see “essentially no growth” in the third quarter and that the fourth quarter “appears to be weaker yet, with an outright contraction quite likely.”

“Indeed, the US economy appears to be in a recession,” Yellen said.

Ebay forecast that quarterly sales, fourth-quarter and annual earnings forecasts would fall as growth slows at its web sites.

EBay forecast fourth-quarter revenue of $US2.02 billion to $US2.17 billion, compared with $US2.18 billion in the final quarter of 2007. the company said the value of goods sold on its sites fell 1% in the third quarter, the first drop in the company’s history.

And late in the day the Fed produced its so-called Beige book.

 ”Reports indicated that economic activity weakened in September across all twelve Federal Reserve Districts. Several Districts also noted that their contacts had become more pessimistic about the economic outlook.

“Consumer spending decreased in most Districts, with declines reported in retailing, auto sales and tourism. Nearly all Districts commenting on nonfinancial service industries noted reduced activity. Manufacturing slowed in most Districts.

“Residential real estate markets remained weak, and commercial real estate activity slowed in many Districts. Credit conditions were characterized as being tight across the twelve Districts, with several reporting reduced credit availability for both financial and nonfinancial institutions.

“District reports on agriculture and natural resources were mostly positive, although adverse weather associated with hurricanes Ike and Gustav negatively affected the South and the Midwest. Inflationary pressures moderated a bit in September.”

It was a very gloomy snapshot of an economy heading lower at increasing pace.

The Fed said that shoppers are becoming more price conscious, credit was becoming even harder to come by and this was sapping sales at the nation’s retailers, the report said. Given this, retailers foresee a “weaker economic outlook, including a slow holiday season,” the Fed said.

The survey was released shortly after Fed Chairman Ben Bernanke, in a speech in New York, warned that it would take time for the country’s economic health to mend even if badly needed confidence in the US financial system returns and roiled markets stabilize.

In the UK unemployment is on its way to 2 million sometime in the next six months after another rise in August to 1.79 million, or 5.7%. As bad as that is, the rate is still well under America’s 6.1%.

The official figures show that UK jobless rose 164,000 between June and the end of August. The higher-than-expected increase - of 0.5 percentage points to 5.7% was the largest since 1991 and the eighth successive monthly rise. (It’s nine in a row in the US).UK inflation hit an annual rate of 5.2%, a 16 year high.

Our unemployment rate in September rose to 4.3%, where are a long way from the depths of the US and UK economies!

 —–

In Europe, new car sales 8.2% last month as the financial crisis put off potential buyers.The continent’s automakers association said in a statement: “The drop in registrations confirms the aggravating market circumstances, as the fall-out of the financial crisis hits auto manufacturers hard.”

“Customers are increasingly hesitant to make large expenditures and find it more difficult to get their purchase financed.”

ACEA said a total of 1,304,583 new cars were registered in September in the 28 countries it reviewed - the 27 EU member states, minus Cyprus and Malta, plus Iceland, Norway and Switzerland.

—–

In Moscow local bank Globex yesterday banned depositors from withdrawing their money as confidence in the Russian banking system began to show signs of ¬evaporating.Globex is a mid-sized retail bank with assets of $US4 billion, according to the Financial Times. It’s the first Russian bank to experience a run on deposits during the crisis.

It lost 28% of its deposits since the start of last month, according to local analysts.

At least a dozen other Russian banks have reported a sharp rise in withdrawals and account closures.

—–

Hungary was plunged into deeper financial uncertainty overnight with its currency (the forint) and stock market falling sharply and bankers reporting credit shortages, as concern spread across eastern Europe about the impact of the global financial crisis. In Budapest, the forint fell 5.3% to 266 to the euro and the BUX index of leading stocks closed down 12%, dragged down by a 15% fall of price of OTP, the country’s biggest bank. Currencies and stock markets also fell in Poland, the Czech Republic, Romania and Ukraine.The Hungarian turmoil followed moves by leading banks to stop or curtail foreign currency lending, the dominant form of credit in Hungary in recent years.

Analysts now say there’s a rising chance that the inflow of foreign currency will slow, reducing the funds available for financing the country’s current account and putting more pressure on the currency and on the solvency of banks and other financial groups.

The European central Bank will lend 5 billion euros to Hungary to support the currency and the economy.

—–

So what does this mean for Australia?

Rory Robertson is an interest rate strategist at Macquarie Group; here’s his take on what lies ahead for Australia. It’s both positive and negativeBusiness investment is Australia’s “weakest link”

Prospects for business investment have deteriorated sharply across the globe in recent months, as equity prices have imploded, credit conditions have tightened sharply and commodity prices have slumped. Keynes’s famous “animal spirits” have been crushed, pretty well everywhere.

This is a big deal for Australia; because business fixed investment (BFI) is at a multi-decade record 16% of GDP, after having trended higher since the end of the early 1990s recession.

In the 2000s, the uptrend in BFI has been driven by spending buildings and structures, a chunk of it mining-related (see top left of p6 at http://www.rba.gov.au/ChartPack/output_expenditure_activity_fincon.pdf ).

With animal spirits, spending power and commodity prices having turning down as the global credit crunch intensified, BFI will be the weakest link in Australian GDP growth in coming years.

Indeed, if the Australian economy goes into recession, BFI will be the main driver, as always.

Household spending will be relatively strong, particularly now that fiscal and monetary policy are providing a large boost to household cash flows via lower mortgage rates, and income top-ups for families, pensioners and first-home buyers (see below; and note the heavy official focus on mortgage rates rather than business borrowing rates, to this point at least).

Four upbeat factors that give Australia a fighting chance in global downturnAs regular readers are aware, I’ve been a bit of a “doom and gloomer” all year. In a NZ conference call last week, I was asked to say something positive, to highlight any recent positive developments. I highlighted four factors that give the Australian economy a fighting chance in a global recession:• The RBA’s effective policy framework, and plenty of monetary ammunition. The RBA has cut its cash rate by 125bp in the past six weeks, and the standard-variable mortgage rate has fallen by 105bp. The Fed, the ECB and the BOE can only dream of that sort of powerful pass-through.

Moreover, the cash rate still is a relatively high 6%, so there’s plenty of room for lower rates as required. I’m guessing the RBA will cut to a “neutral” 5% by Christmas, dragging mortgage and business rates significantly lower (see further discussion below, and attached RBA Watch).

The weak A$ now is Australia’s new best friend, given the substantial recent drops in global commodity prices. The A$’s 20-30% decline from recent highs is a huge free kick to Australian exporters and import-competers, to the extent that it is sustained. As noted here last week, some of our tradeable sectors suddenly are back in business.

Yes, global demand is weakening fast but at least our tourism, agricultural, manufacturing, education and other tradeable sectors will sell more with the A$ near 70 US cents than near 90 US cents (or with the TWI in the 50s rather than in the 70s).

 Canberra’s pristine balance sheet means there is plenty of fiscal ammunition (see p8 at http://rba.gov.au/ChartPack/output_expenditure_activity_fincon.pdf ). Canberra has plenty of room for counter-cyclical efforts, including new spending, tax cuts and loan guarantees, while both Canberra and the States have plenty of room to continue the expansion of their infrastructure programmes.

Indeed, Canberra yesterday announced a pre-Christmas stimulus package worth perhaps 1% of GDP, featuring cash top-ups for pensioners, low and middle-income families and first home-buyers).

Importantly, with a no-net-debt starting point and Australia’s lenders well regulated and still-very profitable, Canberra’s guarantee of financial system deposits and selected (new and existing) debt securities is absolutely credible.

Australia’s housing sector is widely seen as having the problem of “under building” rather than “over-building, as in the US. In Australia, rapid population growth - driven by immigration of 100-200k every year for the past decade - has collided with a flat two-decade trend in new home starts of only 150k per annum. Canberra has overseen the biggest immigration programme in Australia’s history, without initiating the construction of extra homes (”land release” and “planning” for home-building generally is overseen by State and local governments).

The dismal lack of co-ordination between Canberra and the States on immigration and housing long has been seen as a problem, putting upward pressure on home prices and rents, and reducing “housing affordability”. Now, Australia’s slow-moving housing-supply response suddenly is a good thing, limiting the size of any future home-price falls (see p4 of http://www.rba.gov.au/ChartPack/output_expenditure_activity_fincon.pdf ).

 

Immigration and home prices

As you know, falling home prices are a major problem in the US, the UK and parts of Europe. The damage done by falling home prices to banks’ balance sheets in these economies - and growing damage to consumer spending - obviously needs to be avoided in Australia. According, while largely unstated, maintaining Australian home prices near current levels now is a major policy priority for the RBA and Canberra.

Aggressive rate cuts obviously help, so too yesterday’s prodding of up-to 150k first-home buyers into action.

In this context, recent reports of growing pressure to reduce our immigration intake are somewhat disturbing.

Recall that, during the early-1990s recession, net immigration collapsed from 170k in 1989 to just 30k in 2003 (lowest four-quarters-ended figure), reinforcing the Australian economy’s tendency to stall.

From a macroeconomic perspective, cutbacks of that order this time around should be avoided like the plague (see Net overseas migration to Australia highest on record: ABS and SMH: Rudd flags cut in migrant numbers )

To recap, all the important policy efforts so far are counter-cyclical in nature: in particular, the RBA’s rate cuts, Canberra’s timely fiscal stimulus, as well as its guaranteeing of aspects of the financial sector, its promotion of mortgage lending and the ban on “short selling” (not to mention the big market-driven drop in the A$).

By contrast, reducing immigration is a pro-cyclical measure, essentially working against the policy initiatives listed above.

RBA policy, lower interest rates, and limiting falls in home pricesThose forecasting big falls in Australian home prices would do well to notice the recent dramatic drop in mortgage rates, with more to come.The correspondingly sharp drops in interest payments relative to household income render much less relevant the elevated debt/income ratios parroted by some.

Comparing stocks with flows typically tells us little worth knowing; comparing interest payments with income (flow/flow) and debt with assets (stock/stock) provides more meaningful information.

With the world economic and financial backdrop having turned so nasty, aggressive RBA easing was/is the most obvious policy response available to support ongoing economic growth.

And in six short weeks, the RBA has demonstrated that its interest-rate tools are far more powerful than those available the Fed, the BOE and most if not all other central banks. Despite much media focus, elevated inter-bank lending rates haven’t stopped big drops in mortgage rates in Australia.

To recap, the story so far:

the RBA has cut its cash rate by 125bp in two steps (25bp followed by 100bp), with more to come

the three-month bank-bill rate (BBSW, a key guide to a chunk of bank-funding costs) has dropped by about 1-1/3pp over the past month, to 6.1%; and

Headline mortgage rates have fallen by 105bp, to about 8-1/2%. Furthermore, three-year fixed mortgage rates have dropped by more than 1pp and now are widely available near 7%. Other important lending rates also are coming down, though not as quickly.



In Australia, the 84% (105bp/125bp) pass-through so far from the cash rate to standard mortgage rates has greatly surprised the consensus, because when I wrote a note in August headlined “First 50bp of cuts to be ‘passed on’”, many/most were sceptical to say the least.

Importantly, the latest funding assistance provided by the RBA to major home lenders may mean that the next cash-rate cut will pass-through to headline mortgage rates in full.

That is, the RBA last Thursday announced the availability of six-month and one-year repos against “related party” collateral in the form of residential mortgage-backed securities (RMBS) and asset-backed commercial paper (ABCP).

On top of that assistance, Canberra’s announcement on Sunday helps with “term funding” for periods of up to five years (see Expansion Of Domestic Market Facilities and Guarantee of Wholesale Funding and Deposits ).

Critically, recent 1pp-plus drops in cash, BBSW and mortgage rates are gold for Australian home-buyers, providing major cash flow support to the household sector and home prices, something the Fed can only dream about.

That is, despite the funds rate being cut from 5.25% to 1.5%, the rate on (predominant) US 30-year fixed-rate mortgages has dropped by only around 50bp, to 6% or so, when credit is available.

IMPORTANT: AIR reports about financial markets and investment products in the widest sense possible. The AIR website and all its contents is prepared for general information only, and as such, the specific needs, investment objectives or financial situation of any particular user have not been taken into consideration. Individuals should therefore talk with their financial planner or advisor before making any investment decisions.

Cars, planes, retailing, engineering, food and building groups around the world cut earnings forecasts, production or jobs on Friday in one of the gloomiest days of the year so far for earnings and stockmarket confidence.

And there will be more of the same this week (See below).

The announcements from Australia to Brazil, Japan, North America and Europe, are definite signs of the rapidly approaching recession that is going to crunch non-bank earnings 40% or more from current levels, according to equity strategists at Citigroup in London.

The Australian dollar was hammered on Friday, shedding more than 12% in value against the yen and 8% against the US dollar in the biggest single one day fall since floating back in 1983.

It was for no apparent reason.

Citigroup’s team said in a note to global clients last week that ‘History suggests the severity of the coming economic downturn should be greater than normal.

“Recessions following previous periods of financial stress have lasted twice as long as normal. The lost economic output is also greater.

“Earnings Downturn - More severe economic weakness will likely drive a deeper and longer global corporate earnings downturn.

“We believe we are in the early stages of an earnings recession that could last for at least 2 years, with ROEs declining to 8% and EPS falling by 40-50%.

“Global equity valuations suggest investors have already discounted almost all of the expected decline in earnings. Current valuations are back down to 1970s averages.”

“Economic growth is slowing in emerging economies as well. In Asia Pacific our economists believe region-wide GDP growth in 2009 will be the slowest in eight years.

“However, given the current financial crisis is not emanating from their backyard this time, growth should be comfortably above the depths achieved during the Asian crisis.

“The outlook is darker for other emerging economies more dependent on capital inflows.”

Currencies lost ground against the US dollar and/or the yen: the Aussie dollar fell 8% and 12% or more against both currencies respectively on Friday. Copper, oil and most other commodities fell. Only nickel rose on the back of production cuts by the giant Vale group of Brazil, the world’s second biggest producer.

There was evidence hedge funds accounted for some of the turmoil on Friday. They are being forced to sell their stocks, bonds and other instruments to pay off their investors and lenders. Beyond that, investors are increasingly convinced that the global economy is headed for a long, painful recession.

The Citadel hedge fund group reassured investors at the weekend that it had enough liquidity and that Fed inspectors were not talking to it.

But nerves are taut in the hedge fund industry as investors recall their funds, billions of dollars in investments are sold off and the stability of more and more groups is being questioned (around $US200 billion has been wiped off the value of funds in the past few months and a couple of hundred funds of varying types have gone bust, been wound up or cut back business to where they are no longer significant players).

The flight to safety is hurting once-mighty currencies like Britain’s pound. On Friday, worries about how the financial crisis would affect Britain’s economy caused the pound to lose 8c against the dollar, falling to $1.53.

On Wall Street, the Dow Jones Industrial Average slumped 312.30 points, or 3.6% to 8,378.95, in a volatile session that saw the blue-chip index down as much as 500% at one stage.

The Australian share market wiped $30 billion from its value to end the week at its lowest level in almost four years as the All Ordinaries dropped 107.7 points, or 2.73%.

That was a loss of 3% over the week, which was relative outperformance compared to the sharp falls on Wall Street, in Tokyo and in London. The Australian dollar fell heavily on Friday to close down almost 6% over the week at 62.20 USc.

The South African rand plunged 11%.

Even the 1.5 million barrel a day production cut by OPEC failed to stop oil prices falling in the face of swelling fears of a deep global recession.

In New York the Standard & Poor’s 500 index fell 3.5% and Nasdaq slid 3.2%. Both trimmed steeper falls in morning trading. But there was a sharp fall away in the market right at the end as fund selling again hit prices.

For the week, the Dow lost 5.3%, the S&P 500 lost 6.8% and the Nasdaq fell 9.3%.

So far this month, the Dow is off 22.8%, the S&P 500 is off 24.7% and Nasdaq is down 25.8%, on track for the worst month since the October 1987 crash.

In the S&P’s case, this October could end up being the worst month ever in the post-World War II era.

The trio is down more than 40% since the Dow and S&P 500 hit all-time highs a year ago and the Nasdaq hit a bull-market high.

The Australian SPI 200 futures were 37 points lower at 3840, pointing to a lower start today.

In the US the bad news about banks continued: Authorities in the state of Georgia have shut down a failed suburban Atlanta bank. The Georgia Department of Banking and Finance closed the two branches of Alpha Bank and Trust in Alpharetta on Friday, the 16th US bank to fail this year.

Iceland’s government said it had asked for $US2 billion of support from the International Monetary Fund, the first Western country to do so since 1976; Belarus (next to Russia) joined Iceland, Pakistan, Hungary and Ukraine in requesting at least $US20 billion of emergency loans from the International Monetary Fund to help repay debt.

The IMF reached agreement with Ukraine on a $US16.5 billion loan to help support the nation’s financial system as turmoil in global credit markets and recession concerns roil the eastern European country.

The two-year stand-by loan will be conditional on parliamentary approval of legislation to support the country’s banks. Ukraine will also need to balance the budget and address the current-account deficit.

Argentina, struggling to avoid its second default in a decade, is seeking to raise funds by nationalizing $US29 billion of private pension fund assets, a move that has set off alarm bells in Spain where the country’s biggest banks have huge loans and investments in Argentina (and Brazil and Mexico where the market and currency have plunged).

The IMF said at the weekend that it had tentatively agreed to the Iceland loan and announced it had set aside hundreds of billions of dollars to rescue stricken nations. (According to articles in the Economist and the Financial Times at the weekend, it could finance up to $US250 billion or more in loans and standby credits.)

“The IMF has more than 200 billion dollars of loanable funds and can draw on additional resources through two standing borrowing arrangements with groups of IMF member countries,” the institution said on its website.

The fund is discussing plans to offer so-called hard-currency loans of three to six months at a multiple of the country’s quota of up to five times that figure.

At that suggested multiple, South Korea’s IMF quota of $US4.4 billion, means it could get as much as $US21.8 billion under the program. Mexico might qualify for $US23.5 billion, with $US22.6 billion for Brazil and $US10 billion for Poland.

Iceland Friday became the first western nation to seek aid from the IMF since the UK in 1976. The nation’s economy will shrink as much as 10%. It’s part of a multi group finance package that could total more than $US6 billion.

China, Japan and 11 other Asian nations agreed to set up a $US80 billion fund to fight the credit crunch, The Bank of Japan will be one of those central banks helping fund the Iceland bailout, according to media reports last week, along with central banks in Scandinavia.

More than 40 Asian and European leaders called for an overhaul of World War II-era banking rules.

The leaders “pledged to undertake effective and comprehensive reform of the international monetary and financial systems”, according to a statement issued after the meeting in Beijing at the weekend. Bloomberg quoted Chinese Premier, Wen Jiabao as saying that “we need even more financial regulation to ensure financial safety”.

The US Treasury had planned to announced capital injections into 20 new banks on Friday, but will allow the banks to reveal the deals. PNC got $US7 billion to help in a takeover of a large regional bank based in Ohio.

The Treasury Department was also reportedly studying how it could give relief to bond and mortgage insurance companies under the $US700 billion US financial services rescue package.

And while General Motors has intensified negotiations to buy Chrysler’s auto operations, US reports say it now has plans to seek government support for any deal.

Other news from the car industry was appalling on Friday: truck giant Volvo is sacking over a 1500 more employees after it reported that third quarter orders fell to 115, from more than 41,000 in the same quarter of 2007. It has already cut over one thousand employees.

Chrysler announced Friday that it is sacking 5,000 of its 32,000 white collar employees in the US and Europe as soon as it can as its parent, Cerberus, tries to get a cosy merger deal done with General Motors.

Daimler was reported yesterday by German media to be considering a month long production holiday at all its car factories at Christmas to try and cut stocks of unwanted cars and to avoid starting to lay off employees.

The break in production would begin on December 11 and last until January 12, according to the reports. Daimler, the first luxury car maker to present its quarterly results, unveiled big falls in profits on Thursday and issued a new profit warning for 2009 because of the global banking crisis which has hit Germany and its big US markets very hard.

“The financial crisis is turning into an economic crisis,” Daimler chairman Dieter Zetsche told a telephone news conference on Thursday and it had provoked “in recent weeks a dramatic slump on our major markets”.

Volkswagen says it will make more cars this year, but 2009 is looking gloomy, so it is cutting upwards of 750 contract employees in Germany by not renewing their contracts over the rest of the year. Volkswagen reports its latest financial results this Thursday night, our time.

French automobile giants PSA Peugeot-Citroen and Renault ordered huge production cuts, while Japan’s hi-tech giant Sony Corp and Europe’s biggest airline Air France-KLM issued profits warnings.

Renault has ordered almost all its French plants closed for at least one week and shorter shutdowns in Turkey, Russia and Slovenia. PSA Peugeot-Citroen chairman Christian Strieff said he had ordered “massive” production cuts as the group forecast a 17% drop in car sales in Western Europe in the fourth quarter (after an 8%-plus drop in September).

Air France-KLM shares fell around 9% as the airline not only said that it would be “very difficult” to meet its billion-euro earnings target, but also revealed plans to hack costs by up to 1.2 billion euros, which can only mean job losses.

Toyota confirmed it sold fewer cars in the September quarter than the year before, the first quarterly fall since 2003. Japanese car companies start reporting first half and second quarter results this week with Honda due to release its figures tomorrow night and Toyota a week Wednesday.

Toyota said global auto sales retreated 4.3% in the September quarter, from a year earlier, the first drop since 2001. The stock fell 6.4%. It’s off more than 40% this year and Tokyo as a whole is down more than 50%.

Brazil’s Vale, one of the world’s top three miners, said that Chinese demand for metals was down sharply but that it wouldn’t ship iron ore without a 12% price increase to match prices its Australian rivals were being paid.

But it is cutting nickel production in China and delaying start ups at new mines in Brazil and in New Caledonia, and reviewing other mining operations.

In Britain, official figures confirmed the country was about to enter a recession, with third quarter growth contracting by a sharp 0.50%.

The official figures on Friday supported forecasts earlier in the week of a recession from Bank of England head, Mervyn King and Prime Minister, Gordon Brown.

Japan’s Nikkei index plunged 9.60% on Friday and below 8,000 points for the first time in more than five years.

The close was 7,649.08, a level not seen since April 2003 and just 41 points from the lowest since 1982. Asia’s and Japan’s biggest construction materials group, Taiheiyo Cement Corp, said it incurred a first half loss because of falling demand in Japan. The loss was more than double earlier estimates.

Hong Kong fell 8.3%.

South Korea’s Kospi index dropped 11% on Friday to its lowest close since May 2005. The index fell 20.5% last week, the worst drop since 1987, while the won also slumped.

India’s Sensitive Index plunged 11% Friday, its biggest slump in 16 years, after the Reserve Bank said it will continue fighting inflation, reducing the likelihood of easier lending to bolster growth.

The central bank surprised a week ago with a 1% cut in its key lending rate, but appeared to cast doubt on that on Friday.

European shares had lost up to 10% in early trading Friday in a replay of the horrific Friday two weeks earlier. French shares fell 8.0% early on to finish at five-year lows, off 3.5% at the end. Frankfurt’s DAX 30 index and London’s FTSE 100 were off around 5%.

Sony, a leader of corporate Japan, saw its shares plunge 14% Friday after releasing forecasts of a lower profit on Thursday night. Sony has a board meeting in Tokyo this week to consider cuts.

ArcelorMittal, the world’s biggest steel producer, shut smelting furnaces on a temporary basis in France, Germany and Belgium, according to union chiefs who met with management. It is reported to be reviewing its $US35 billion global expansion plan.

US figures show that 19 of the country’s 25 steel blast furnaces are either going to close or be shut down for varying periods of time, so great has been the drop in demand in the past two months, especially from the car industry.

Timken, the world’s biggest ball bearings maker, has slashed production and earnings forecasts because of falling demand from the car and construction machinery sectors (Caterpillar).

Timken blamed the cut in its fourth-quarter profit guidance on “the timing of certain raw-material cost recoveries and lower automotive industry demand”.

In other words demand is now weakening so fast that it can’t put prices up to try and recovery the earlier surge in steel costs during the year.

Spain’s unemployment rate jumped to 11.33%, a four year high, as the collapse of the housing and construction sector throws more people out of work. The worries about Brazil and especially Argentina are going to take their toll on Spain’s previously solid banking sector.

New figures meanwhile showed Britain’s economy shrank by 0.5% in the three months to September, compared with the previous quarter, marking the first contraction since 1992.

The UK economy slammed to a halt in the second quarter with zero growth and the slump accelerated into the red as unemployment surged, home sales, construction, industrial output and retail sales plunged and inflation rose.

IMPORTANT: AIR reports about financial markets and investment products in the widest sense possible. The AIR website and all its contents is prepared for general information only, and as such, the specific needs, investment objectives or financial situation of any particular user have not been taken into consideration. Individuals should therefore talk with their financial planner or advisor before making any investment decisions.

A new low for the US dollar, and a mixed bag of economic news, gave investors few clues as to what the FOMC might do next with the interest rate.

Concerns that the housing market ills could spill over into the broader economy have heightened fears of recession. More hints about the economy will be revealed in the next few weeks, as 3rd quarter earning results are going to start making their way to the market.

While most traders were still enjoying the more then expected rate cut, others are thinking that it’s not enough and are expecting another cut after the next FOMC meeting.

Next week, aside from the 3rd quarter earnings, we get the GDP, and the consumer spending data. Both are market movers, especially if the data is weaker then expected.

Other data to be released next week includes inflation and construction spending.

While not as big as the other two, inflation hurts the consumers spending, as it robs their purchasing power, and construction spending is a leading indicator of company’s optimism. Companies tend to spend money on construction when they see a bright future economically.

With all the data coming out next week, it almost assures a week of volatility, with that in mind, I would like to talk about this weeks play.

When volatility spikes, no touch plays become less expensive, however that’s because they are more likely to be hit. As a result, this week, we will focus on the up or down options available at BetOnMarkets.com.

An up or down option allows the trader to specify a trigger on both sides of the market, and win if either of those levels are breached. Unlike its one touch counterpart, in this situation you don’t need to choose a direction.

This weeks play is on the SP500, with a 44 point trigger in both directions, and a 20 day term, potentially yielding 7% ROI

- THE END -

Contact Details:

Email: editor@my.regentmarkets.com

Tel: 35621316105

Address:

Regent Markets (IOM) Limited

3rd Floor, 1-5 Church Street

Douglas, Isle of Man

IM1 2AG

Betonmarkets.com is the leading fixed-odds financial betting website. The website has processed over 10 million bets since inception in 2000, and generates annual turnover in excess of US$ 100 million. Betonmarkets offers a wide range of fixed-odds financial bets on forex rates, stock indices, and international stocks.

Betonmarkets is operated by the Regent Markets Group of companies. Regent Markets is affiliated to the Regent Pacific Group, a Hong Kong-listed

investment group. Regent Markets has offices in three countries, and holds bookmakers licenses in the Isle of Man, the UK, and Malta.

Fixed-odds financial betting offers particular advantages over other forms of financial betting and investments, such as limited risk, potentially high payouts, and unique market opportunities. Particularly popular is Betonmarket’s Range Bet, which offers the opportunity to profit from a period of quiet market action.

Betonmarkets also offers the following bet types: the Bull/Bear bet, the One Touch bet, the No Touch bet, the Range and Expiry Range bets, the Double One Touch and Double No-Touch bets, and a variety of intraday bets. Contracts are available on foreign exchange rates, major stock indices, and stocks.

Fixed-odds bets are also known as binary options, binary bets, contingent claims, spot options, box options, clickoptions, and offer market participants a unique tool to profit from market movements.

BetOnMarkets Bet Types:

One Touch Bet: You would buy a one-touch bet if you believe the market will touch a given point at least once before the bet expires. In other words, a one-touch pays out, if at any time prior to expiration, the market touches or trades through the specified barrier. Example: [Pays 100 if the FTSE touches X between today and date T]

No Touch Bet: A no-touch bet is the opposite of the one-touch bet. You would buy a no-touch bet if you think the market will never reach a certain level within a specified range of time. Example: [Pays 100 if the FTSE does not touch X between today and date T]

Bull Bet: You would buy a bull bet if you believe the underlying security/index/currency pair will be higher than a certain level (also referred to as the barrier level) on the maturity date. Example: [Pays 100 if the FTSE closes higher than X on date T]

Bear Bet: You would buy a bear bet if you believe the underlying security/index/currency pair will be lower than a certain level (also referred to as the barrier level) on the maturity date. Example: [Pays 100 if the FTSE closes lower than X on date T]

Expiry Range Bet: You believe that the market will be between two distinct levels (high and low) on the expiry date. Example: [Pays 100 if the FTSE

closes between X and Y on date T]

Barrier Range Bet: You believe that the market will never touch two pre-determined barrier levels (high and low) before or on the date the bet

expires. In other words, when you buy a barrier range you will win only if the market never touches the two barrier levels you have chosen. Example: [Pays 100 if the FTSE never touches X and Y between today and date T]

Double Touch Bet: You believe that the market will touch two pre-determined barrier levels (high and low) before or on the date the bet expires. In other words, when you buy a barrier range you will win only if the market touches both of the two barrier levels you have chosen. Example: [Pays 100 if the FTSE touches both X and Y between today and date T]

Up or Down Bet: You win if the market touches either of two pre-determined barriers before or on the date the bet expires. Example: [Pays 100 if the FTSE touches either X or Y between today and date T]

Double Up Bet: A Double Up bet pays two times the premium if the market rises above a given level between the time of purchase and the close of trading. It expires at the close of business on the day of purchase of the bet. Example: [Pays 100 if the FTSE closes above X between now and the close of trading today]

Double Down Bet: A Double Down Bet pays two times the premium if the market drops below a given level between the time of purchase and the close of trading. It expires at the close of business on the day of purchase of the bet. Example: [Pays 100 if the FTSE closes below X between now and the close of trading today]

Intraday Double Up Bet: Buy this bet to play a market rise between two given hourly market times today. You will have the possibility to set the starting hour of the bet and the ending hour of the bet, and you will win double your stake if the market follows your prediction. Example: [Pays 100 if the FTSE rises between the starting time hour and the expiry hour]

Intraday Double Down Bet: Buy this bet to play a market drop between two given hourly market times today. You will have the possibility to set the

starting hour of the bet and the ending hour of the bet, and you will win double your stake if the market follows your prediction. Example: [Pays 100

if the FTSE declines between the starting time hour and the expiry hour]

Run Bets: These fun bets are over in the space of less than a minute; so you can make money in seconds. Here, you have to guess the last decimal digit of say, the USD/JPY (predict 3rd decimal place) after 5 ticks.

Development finance UK is still a strong way forward for people looking to gain profit from property development. For example, the buy-to-let market in the UK alone is valued at 15 billions pounds. This is based on the data from The Association of Rental Lettings Agents. Aside from the strength in the property market in the UK, and its ability to provide 100% development finance with various favorable options, investors are also taking their development finance in the eastern and central Europe emerging markets. There is also an opportunity in dollar-dependant countries where the currency exchange rates offer cheaper deals.

 

Successful developers who have sought the assistance of development finance UK say it isn’t just about getting your needed residential or commercial development finance. It is more importantly utilizing the funds by doing research to tap other prospect with promise of high returns. Finding areas that are on the verge of regeneration or are planning changes in infrastructure such as conversion of commercial areas, are good places to look. You need also to see prospect in other places outside the UK which are looking for foreign investment in real estate. This is even made easier with the assistance of the companies in development finance UK who go beyond the boundaries of UK.

 

If you simply want to stick within the UK market, it has scope for investors looking to secure residential and commercial development finance. Companies in development finance UK are still capable of giving the best deal in 100% development finance, bridging loans, and other funding schemes. All in all, there is still opportunity in property development for investors looking for high returns.

The problems in the Australian housing market pale into insignificance beside the woes of credit markets in the wake of Lehman Brothers bankruptcy, but they do tell us something about the Australian economy.

Yes, housing, especially new homes, are depressed with a low level of starts, especially in NSW.

But unlike the US where new home starts are 30% or so under what they were a year ago, our home building industry isn’t on its knees, despite what you might read from time to time.

There is some life, not much, but its still there. And that tells us a lot about the slow, but solid health of the economy.

The Australian Bureau of Statistics said that 38,348 homes were started in the three months to June, a seasonally-adjusted drop of 3.7% on the March quarter.

That was the lowest quarterly figure in a year, but given the sharp rise in the cost of money over that time and the drop in consumer confidence, it was an understandable outcome.

It gives an annual rate of just over 153,000 new homes a year, 20,000 under what’s really needed.

But in a tiny bit of encouragement was that new private home starts were up 4.1% quarter on quarter and other private new dwellings (home units etc) fell a very sharp 17% in the June quarter, compared to March.

And, compared to the June quarter of 2007, there was a 2.1% rise in total new dwelling starts and a 5.4% rise in new private home starts. Other new private dwellings were down 3.7% in the June quarter, compared with the June 2007 quarter.

So while activity has been quiet and well below the capacity of the industry (as the Housing industry Association has been pointing out), our industry hasn’t down and out like the debt and loss-riddled US and UK sectors.

Westpac yesterday cut its fixed mortgage rates for new and existing customers, a sign that funding pressures continued to fall, but also an attempt to position it as being ahead of the rate cut curve.

The new rates apply from today, but until it or other banks cut the extra margin of half a per cent or more built into its variable rates, there will be no reason to boast.

Variable rates are by far the most popular form of mortgage and it would take a real upsurge in demand for housing loans to see some rate cutting competition emerge, but that in turn would horrify the RBA and prompt a rethink on interest rates.

 

Remember the RBA is worried about inflation and has long regarded the housing sector as a good indicator of consumer and economic expectations; and inflationary pressures, particularly on building material costs and wages.

The abs said that seasonally adjusted estimate for the total number of dwelling units commenced fell 3.7% in the June quarter which follows a revised fall of 1.0% in the March quarter; the seasonally adjusted estimate for new private sector house commencements rose 4.1% in the June quarter following a revised fall of 5.3% in the March quarter.

(That’s quite a turnaround and is a stark contrast to the unremitting gloom from the US and UK).

The weakness has tended to be, if anything in the “new private sector other residential building” part of the industry, to use the descriptor of the ABS. Essentially its apartments and units, much of it driven by investor demand and activity.

The home unit and residential sector in places like the Gold and Sunshine Coats, parts of inner Sydney and Melbourne (Docklands) has cooled.

So much so that Raptis, the big Gold Coast home unit developer is in trouble, looking to raise hundreds of millions of dollars of new money in the next month to remain alive.

It has up to $700 million of new properties and projects it could sell, if buyers appear. That’s not very likely given the tough financial climate at the moment.

If anything the downturn in commercial building finance has affected this part of the industry, rather than new private building which tends to be financed by private individual mortgages.

Seasonally adjusted, the estimate for new private sector other residential building fell 17.1% in the June quarter following a revised increase of 9.5% in the March quarter.

The housing figures provided the backdrop to the release yesterday of the Federal Government’s five-year $512 million housing affordability fund at a residential development in suburban Canberra.

In a bit of PR spin, Mr Rudd said the fund would bring down the cost of houses and new developments by up to $20,000 by reducing infrastructure charges and speeding up planning approvals.

So perhaps that might be better applied to NSW where the problems seem to be concentrated. Despite being the biggest state, the biggest population and the largest home building sector, NSW is now not even outbuilding Queensland, let alone Victoria.

According to the ABS figures around 6,990 houses were started in NSW in the June quarter, against 9,850 in Victoria and more than 10,700 in Queensland.

No wonder the recent national accounts showed NSW contracted in the June quarter: the housing performance played a big part in that grim news.

IMPORTANT: AIR reports about financial markets and investment products in the widest sense possible. The AIR website and all its contents is prepared for general information only, and as such, the specific needs, investment objectives or financial situation of any particular user have not been taken into consideration. Individuals should therefore talk with their financial planner or advisor before making any investment decisions.

As another volatile trading week draws to a close, it is interesting to note that almost no major stock market made any traction in either direction over the last 5 trading days. The Dow swung over 450 points from high to low and the FTSE 200 points, yet both markets closed virtually flat for the week.

It was a week of dire earnings figures with UK banks posting huge year on year profit reductions. Lloyds TSBs pre tax profits fell 70% while HBOS saw returns drop by an almost identical figure. In what will be their last report as in independent company, Alliance & Leicesters profits evaporated by an incredible 99%. In the US, Merrill Lynch was punished heavily for releasing details of a write down announcement less than a fortnight after their earnings figures. It wasnt just the banks feeling the pinch, British Airways reported an 88% slump in profits and BT saw its shares fall to their lowest level for five years.

On a positive side stocks soared on Tuesday and Wednesday, as oil fell further towards $120 on speculation that a slowing global economy will check demand. It was to be further bad news for hedge funds, who recently endured their worse month for many years, as the leveraged oil trades unwound with falling prices. Stalling oil prices were also not helping BP, as it pulled back further from previous highs. The headline results were impressive, but a significant proportion of those profits come from their Russian joint venture, which looks like it will be torn apart over the coming months.

Elsewhere the US house price collapse continues to accelerate. The S&P/Case-Schiller Index shows annual declines in prices of existing single family homes of 15.8%. With UK politicians discussing plans to help out mortgage lenders, they would be well served to use the US housing market as an advanced proxy of what could happen in the UK.

Initial reactions to Fridays US Nonfarm payrolls were positive as the headline figures fell less than expected. However, on close inspection, the figures still make grim reading. The US unemployment rate increased to 5.7%, which was 0.1% above expectations, and since December 2007 463,000 jobs have been lost. Although the jobs report was the Friday’s big story, GMs earnings announcements was a big drag on US and by consequence, UK indices. General Motors announced a $15.5 billion loss, which when you consider GM has a market cap of just $6.3 billion, the loss equates to around 2.5 times the net worth of the company.

Next week is unlikely to bring an end to the recent volatility with some major top tier economic announcements due. On Tuesday morning we have UK manufacturing data and services PMI, followed by US ISM non-manufacturing composite early in the afternoon. On Tuesday evening, we have the big one, the US interest statement. Although a no change is largely expected, as ever it is expectations for the future that will excite. It is Europes turn on Thursday, with the release of the MPC and ECB statements. Both are again expected to be no change, but the statements and overall timbre will be analysed and re-analysed with regard to future expectations.

Markets have been working themselves out of oversold territory and now it is crunch time. The recovery since the lows of July, could be the bulls last rally for the short term, unless any gains can actually be held over the next week or so. What has been impressive about the last two or three weeks is the bulls ability to rally markets in the face of dark news flows. Now the rally has stalled, there may not be enough momentum left to withstand further bleak economic headlines.

Next week has the potential to be another volatile week says BetOnMarkets financial analysts, especially with so many top tier economic announcements due. A double touch trade returns a profit if both pre determined levels are touched within the time frame specified. A double touch trade on the FTSE 100 predicting that the 5450 and 5100 levels will be hit over the next 51 days could return 140%.

The downturn in commodities since the middle of July has been pretty vicious and this week it seemed to be made more tense by the way the market fell across the board as Hurricane Gustav squibbed it and didn’t prove to be the major destroying storm that many had feared.

The way, oil, gold, copper and other metals, plus major grain prices fell after the passing of Gustav indicates that the old fear about supply shortages no longer dominates thinking in these commodity markets.

Most commodities were weaker to  steady overnight Wednesday, but it was more of a holding pattern than any sort of recovery.

For Australia, as we start enjoying the fruits of the boom, it’s a timely reminder that more needs to be done here to make the economy more efficient and more productive.

We are at present relying on higher receipts for our coal and iron ore exports and not much more as prices for other resources have titled downwards since the slump started.

If anything should slow China’s economy in the next year or so to a much lower level of growth, then we will be exposed to a much sharper slump in activity than we saw with yesterday’s GDP numbers.

The Reuters-Jefferies CRB index, a global benchmark for commodities prices, has fallen 18.9% since June 30, to a six-and-a-half-month low, after surging in the first half by almost 30%.

July was in fact the worst month for many commodity indexes for 30 years or so because mainly of the steep drop in oil prices.

Prices are still higher than they were a year ago, but as we move through the rest of 2008 and into 2009 that premium will either simply disappear with each month’s comparison, or will show up in more price falls to the point where the comparison is negative.

We have to assume that just as commodities probably overshot and went to high from March through mid-July that prices will overshoot on the way down and fall to unsustainably low levels. 

But some analysts warn that because their financial investors involved there could be a much steeper fall than expected simply because of the impact of momentum.

Oil is trading closer to $US100 a barrel than it has for more than five months, gold eyed and eased under $US800 an ounce, copper, is glancing towards the $US3 a pound level and wheat, soybeans and corn futures prices are busy retracing former price rises.

Gold was trading at $US799.90/800.90 an ounce in Asia late yesterday, down from $US804.90/806.25 an ounce late in New York Tuesday, when it fell as low as $US790.40 after oil dropped and the dollar rallied. It traded just above $US800 an ounce in New York overnight.Gold struck a nine-month low around $US773 in mid-August.

 

Oil traded around $US109 a barrel in New York.

This sharp sell off in commodities, led by oil seems to have had its first notable victim among investors with a multi-billion dollar hedge fund imploding and now facing being broken up.

Bloomberg has reported that this slump had ensnared Ospraie Management of the US which is going to close its biggest after it fell almost 27% in August and 38.6% from the start of 2008. It’s 20% owned by the struggling Lehman Bros investment bank.

Bloomberg said the Fund had a value of $US2.8 billion at the start of last month, so the loss would have been in the order of $US750 million in the month.

Bloomberg said a letter from founder, Dwight Anderson, to investors explained that the Ospraie Fund lost 26.7% in August, after a “substantial sell-off in a number of our energy, mining and resource equity holdings.”

“I am extremely disappointed with this result and the fund’s sudden reversal in performance. After nine years of striving to be a good steward of your capital, I am very sorry for this outcome.”

The Ospraie Fund was started in 1999.

Bloomberg said that the closure of the Ospraie Fund leaves the New York-based firm overseeing three remaining funds with more than $US4 billion in assets, down from $9 billion in March.

Commodity market indexes fell by around 10% in August, and are off 20% since the slump started in Mid-July as investors switched out of mining and resource investments and into mainly US shares because of expectations the US wouldn’t slump as much as Europe, Asia the UK or Japan would.

It sold out of Iluka in recent days, according to a statement to the ASX from the beach sands miner and processor yesterday evening.

Oil closed at around $US115.46 a barrel in New York on Friday before the holiday long weekend. At one stage overnight the price was down around $US105 a barrel.

Copper plunged as well, losing nearly 11 US cents a pound in New York to close at $US3.29 a pound (a seven month low) while gold fell by around $US24 to $US810 an ounce.

The Australian dollar weakened, falling to a day’s low of 82.70 US cents, that’s also the lowest for around a year. It then recovered back over 83 US cents.

While that followed the Reserve Bank’s 0.25% rate cut yesterday, it wasn’t the major reason. The rate cut had been widely expected and was in the price of the currency: it was the sharp drop in oil, copper and other commodities that hit resource-based currencies including the Aussie overnight.

The futures prices for wheat, corn and soybeans all fell sharply as well as Gustav faded.

It was a significant slump across the board for commodity prices. Metals in London, led by lead also fell sharply.

Markets were tossed around as investors wondered about whether this rapid correction would finish.

Not helping was a gloomy assessment of the current state of the world’s major economies that helped ended the whoopee over oil prices.

The Organisation for Economic Cooperation and Development warned that overall, “the picture for the major economies is of a particularly weak second half”.

It saw a growth uptick for the US, but the eurozone and UK economies will “barely creep forward” in the second half of this year.

The OECD suggested that global financial turmoil might be entering a “new phase” with the stream of bad news reported by banks now reflecting generally economic weakness rather than direct effects of the credit squeeze.

The OECD revised up significantly its forecast for US growth this year, after significantly stronger-than-expected second quarter data. It expected 1.8% growth, compared with its previous forecast of 1.2%.

But surveys out yesterday showed a sharper than expected fall in US construction spending and a contraction in manufacturing, led by a drop in forward orders, employment and inventories. Exports were up and inflation eased.

The OECD gave itself an out by warning that there was a lot of uncertainty about how quickly the effects of the US fiscal stimulus package would fade.

The OECD was worried about inflation in Europe and overnight those concerns were given some additional impetus with news that producer prices in the 15 country eurozone rose 1.1% in July, compared with 1% in June. That made for an annual rate of 9% (not much different to the US) in the year to July.

European retail sales fell 2.1% in July compared with July 2007, after a record 3.1% drop in June.

That won’t be enough to get the ECB to cut rates tonight, while the Bank of England’s next move is unclear, despite the overwhelming weight of gloomy news about the British economy. Its decision will come tonight, our time.

A desperate Labour Government has attempted to boost the sinking housing sector by significantly expanding the stamp duty exemption on house purchases of homes worth up to 175,000 pounds from 125,000 pounds. It will cost near $A2 billion in a budget already heavily in deficit.

Money will also go to helping people avoid repossession (nearly $A400 million). But the British pound continued its worst fall in 16 years.

IMPORTANT: AIR reports about financial markets and investment products in the widest sense possible. The AIR website and all its contents is prepared for general information only, and as such, the specific needs, investment objectives or financial situation of any particular user have not been taken into consideration. Individuals should therefore talk with their financial planner or advisor before making any investment decisions.

Banking stock continues to look fragile even with virtually every major nation now standing either as an actual shareholder or at least as a lender of last resort. I am mindful of the fact that if something seems to be too much of a good thing then it probably is.

Irish banks which were virtually the first recipients of State support are now pretty much at their lowest levels. They are even under the prices that triggered the intervention in the first place. With no shorting of financial shares via spread betting, CFDs or otherwise, allowed in the stock this represents continued liquidation of holdings. Market Makers do not, yet, appear ready to be supporters at any level and the fear must be that the State will indeed need to make good on its promise to guarantee every deposit within the system.

The rating agencies have been quick (for once) to look at the actual impact this will have on the actual credit worthiness of the Republic. This might actually be quite a serious development as the ROI is in the European Union and is therefore technically unable to just borrow unlimited sums.

It is a worry that this same scenario might play out across the UK banking prices as well. The government is standing as guarantor of the various rights issues going through but this does not seem to be tempting buyers in any significant size. Too many have lost out in the original issues back in February through May.

As Simon Denham of Financial Spreads recently said, “When the chips are down, the nations with the cash reserves should, in the end, come out on top. This means that Germany, Japan and China are likely to be the long term winners out of all this chaos. However even they will probably suffer in the short term as demand in the ‘consumer nations’ slows somewhat”.

With the various Government agencies now intent on clamping down on Financial services the UK may well be the really big loser in all of this. If State control and FSA over regulation drives business off our shores there are many places across the globe that will welcome it in with open arms. Restrictions on bonuses sound very good in newspaper column inches and give politicians populist appeal but in the end will only serve to drive markets further East. The City employs some 400,000 people but contributes around 9% of the GDP (depending on how you calculate the overall impact through the economy). The State cannot afford to lose this level of revenue otherwise taxes will have to rise to pay for all the things we now take for granted.

Note that spread betting carries a high level of risk and may not be suitable for all classes of investor. Only trade with money that you can afford to lose. Make sure you fully understand the risks involved. If necessary, seek independent financial advice.