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For the week beginning Monday, February 6th

Following last Friday’s rebound on the better than expected U.S. jobs data, commodities got off to a weaker start this morning as focus again shifted back to Europe, depressing risk appetites. In London, Reuters reported mostly softer LME official 3-mo. base metal prices this morning, including for copper ($8,491/mt), aluminum ($2,218/mt) and nickel ($21,200/mt).

In New York, commodity prices trended lower as well, with COMEX March copper off around 4 cents to $3.86/lb. in late morning trading, while NYMEX crude oil for March delivery and COMEX gold for April delivery retreated below $97/bbl and $1,725/to, respectively. On the heels of earlier European losses, stocks on Wall Street also started the week in negative territory, with the S&P 500 off about a quarter percentage point at mid-day while Greek worries continued to weigh on the Euro, which eased to $1.313.

After a couple of big weeks of economic data releases, this week is pretty light on the data front, although we’ll see full year 2011 U.S. trade data late in the week, including for scrap exports. On the corporate front, industry watchers are looking for an official announcement on the proposed Glencore-Xstrata merger when Xstrata reports results on Tuesday. As indicated, Europe remains in focus as markets await word on the latest negotiations between Greece and its creditors and as the governing council of the European Central Bank is scheduled to meet on Thursday. Either way, a tough week for Patriots’ fans.

Guest Blogger: Rob Minto Beyondbrics blog http://blogs.ft.com/

IMF: Europe could hit China, hard

There was another sobering report from the IMF on Monday, hot on the heels of some gloomy stuff from the World Bank and the Fund itself. Monday’s warning: fallout from the eurozone crisis could knock as much as four percentage points off growth in China’s GDP – almost halving the expected 2012 growth rate.

So much for a soft landing. Should we sound the alarm?

The IMF’s China Economic Outlook starts cheerily enough, noting that China remains “a bright spot in an unpredictable global economy”. Inflation is coming down. The property bubble is gently deflating. All seems rosy, then… bang: there is “A clear and present danger emanating from Europe”.

From the report:

The most salient risk is from an intensification of feedback loops between sovereign and bank funding pressures in the euro area, resulting in more protracted bank deleveraging and sizable contractions in credit and output in both Europe and elsewhere.

Should such a tail risk of financial volatility emanating from Europe be realised, it would drag China’s growth lower. The channels of contagion would be felt mainly through trade, with knock-on effects to domestic demand. In the downside scenario… China’s growth would fall by around 4 percentage points.

The risks to China from Europe are, therefore, both large and tangible. Large and tangible indeed: as the FT’s Jamil Anderlini noted recently: the Communist party has formulated economic policy on the assumption that 8 per cent GDP growth is the minimum needed to stave off the social instability that could threaten one-party rule.

What’s to be done?
According to the IMF, the key response should be a fiscal stimulus worth around 3 per cent of GDP. The Fund says this should consist of cuts in direct taxes and social contributions along with subsidies for consumption of consumer durables and support for small businesses – in contrast to the big public infrastructure-led stimulus of 2008. This would keep the stimulus away from the banking system, avoiding any further balance sheet risks.

In the IMF’s January World Economic Outlook Update, the eurozone was only one of several downside risks cited – a US and/or Japan slowdown was another, along with oil supply risks. But clearly it’s the eurozone that is weighing heaviest on the minds of the IMF. The big question then is: how likely is the “downside scenario” to come about? The IMF gives no guidance on that. For the time being, it suggests China should fine tune monetary conditions to allow for modest additional credit to the economy.

It would also be worth having that stimulus ready. Just in case.

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ISRI Spec of the Week: From ISRI’s Scrap Specifications Circular 2011, Guidelines for Nonferrous

Scrap:

Druid INSULATED COPPER WIRE SCRAP

Shall consist of copper wire scrap with various types of insulation. To be sold on a sample or recovery basis, subject to agreement between buyer and seller.

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Monday’s Quote: The only function of economic forecasting is to make astrology look respectable.

-- John Kenneth Galbraith